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It can be hard to know who you can trust with financial advice. Asking one key question can help: Are you a fiduciary?
A fiduciary is someone who has a legal duty to act in the best interest of their client when offering them financial guidance and managing their money or property.
However, “not every financial professional is required to do that,” said certified financial planner Douglas Boneparth, president and founder of Bone Fide Wealth, a wealth management firm in New York City. (CFPs are held to a fiduciary standard.)
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For example, some financial professionals follow only a “suitability” standard, he said.
“Which means their recommendation just has to be appropriate, not necessarily the best option,” said Boneparth.
A fiduciary ‘creates alignment’
Prior administrations and lawmakers have tried but failed to implement a fiduciary standard to cover more financial professionals and advice, but those efforts have faced political, legal and industry pushback. Today, it’s largely up to individual investors to make sure they’re working with a professional who is a fiduciary.
Failing to do so can lead to bad outcomes, “like being sold high-cost investments when lower-cost options are available or being steered into products that benefit the advisor more than they benefit you,” Boneparth said.
“Over time, higher fees and misaligned advice can cost people tens of thousands of dollars,” he said.
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The term “fiduciary” is derived from the Latin word, “fiducia,” meaning trust, said Marguerita Cheng, a CFP and chief executive of Blue Ocean Global Wealth in Gaithersburg, Maryland.
Not only do fiduciaries need to prioritize the client, but they also must disclose any conflicts of interest, said Cheng. That means they should be upfront about how they get paid and whether they receive commissions on certain products, as well as if they’re involved in any business relationships that may influence their advice.
“Every advisor has a conflict of some sort,” said CFP Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida. “The key to being a fiduciary is to acknowledge the conflicts and still do the right thing for the client.”
Ultimately, you should look for a financial advisor who is a fiduciary because “it creates alignment,” Boneparth said.
“You know the advice you are getting is not being driven by hidden commissions or sales quotas, but by what is best for your situation,” he said.
How to find a fiduciary financial advisor
Use the Securities and Exchange Commission’s Investment Adviser Public Disclosure site to look up an advisor’s Form ADV.
“This document lays out how the advisor is compensated, what services they provide and whether they are registered as an investment adviser,” Boneparth said. “If they are, they are bound by the fiduciary standard.”
Consumers can also look for a fiduciary financial advisor with organizations such as the CFP Board, the organization that enforces the standards for certified financial planners, and NAPFA, a professional organization of fee-only, fiduciary advisors.
A fee-only advisor only receives compensation from clients for their advice and planning services and does not earn commissions for selling you a particular product.
Many financial advisors are not fiduciaries, or they are only adhering to the fiduciary standard some of the time, McClanahan said. For example, the CFP Board says that a professional must be a fiduciary when they’re offering financial planning or advice, she said.
“However, some of the firms that call themselves fiduciaries wear two hats,” McClanahan said. “What this means is that when they are not providing financial planning or financial advice, they do not act as fiduciary.”
You know the advice you are getting is not being driven by hidden commissions or sales quotas, but by what is best for your situation.
Douglas Boneparth
president and founder of Bone Fide Wealth
As a result, on some occasions they may sell you a product or inform you about products that are, in fact, not in your best interest. To avoid such an outcome, McClanahan recommends asking your prospective financial advisor: Are you a fiduciary 100% of the time?
“And get it in writing,” she added. The Committee for the Fiduciary Standard’s website provides an oath you can print out and have an advisor sign.
But just because someone calls themselves a fiduciary doesn’t mean they can’t be a bad actor, McClanahan said. Due your due diligence researching the advisor and be on the lookout for other red flags.
“The best way for a client to protect themselves is to make sure they understand how much they are paying, what they are paying for and to make sure the advisor is delivering what they promised,” she said.
Boneparth, Cheng and McClanahan are all members of CNBC’s Financial Advisor Council.
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