David H. Kinder, RFC®, ChFC, CLU
F.A.Q. #9 - Is a 'Fiduciary Securities Advisor' in YOUR Best Interests?
Updated: Jan 18
The term 'fiduciary' has become FAR more marketing 'hype' than it really deserves to be, and that 'hype' is serving only ONE kind of 'advisor' - an advisor that, ironically, might NOT be in YOUR best interests!
Please allow me to explain: In the financial services world, nearly anyone can call themselves a financial advisor, regardless of licensing. The term 'financial advisor' is not a regulated term.
The following titles are regulated terms with corresponding licensing:
Insurance Agent or Producer: One who holds various insurance licenses with one or more states to sell various insurance products such as life insurance, disability insurance, long term care, and various annuities.
Registered Representative (RR): One who holds broker/dealer securities licenses, such as Series 6, 63, 7, etc.
Investment Advisor Representative (IAR): One who holds a Series 65 license and is an Investment Advisor Representative (IAR) for a Registered Investment Advisory (RIA) firm.
Whenever I read that someone is promoting themselves as a "fiduciary advisor", they are saying that they are an Investment Advisor Representative (for an RIA firm) regulated to provide advice about securities under the Investment Advisers Act of 1940.
Let's go back in time a bit: Back before "financial planning" really took off, we had registered representatives commonly known as "stock brokers". They got paid a commission for selling individual stocks and often got their commissions based on the number of shares of stock they sold.
This had almost nothing to do with planning, and certainly not "asset allocation" or any other methodology regarding what would be termed "best interest for the client". This was selling stocks (or other securities) with the promise or premise that the stock would go up in value.
The movies "Wall Street", "Boiler Room", and "The Wolf of Wall Street" (a truly disgusting movie) were based in these kinds of times and compensation structures (obviously showcasing the illegal acts and the worst of these broker's actions). (In contrast, a decent movie about these times would be Pursuit of Happyness with Will Smith.)
Choosing to be an Investment Advisor Representative and to be regulated as one means that you pick and choose securities that fit your CLIENT'S needs, rather than your need to sell stock and earn commissions for those trades.
That's it! It's all about choosing SECURITIES!
What about designations? Don't those assure fiduciary compliance in all areas of advice?
No. There is no designation that has regulatory enforcement over their designees - except to revoke permission to use "their marks". Quite often, they only do such actions AFTER other regulatory bodies (such as FINRA, SEC, or state insurance departments) have already made their case against a licensed professional for their actions. It's rather a ploy for such organizations to make themselves look like a "self regulatory organization", even though they have no such government or other legal authority.
There is more to being a fiduciary than just "talking the talk". One must "walk the walk".
Does your fiduciary advisor have an engagement agreement?
What are the terms of that engagement agreement?
What services are promised?
What is the compensation arrangement?
When does the engagement agreement end?
There's a lot of regulatory and legal issues for being a 'fiduciary advisor'.
Does this fiduciary duty extend to other areas of their business interests such as selling life insurance and annuity products? It could... but when you read up on the investment advisor representative, it primarily says that "these activities will be conducted in the spirit of being a fiduciary" (whatever that means). Generally, being a fiduciary primarily applies to activities and outside business activities as outlined in their ADV Part 2 "brochure". But such activities must be disclosed.
In fact, if you were to look up an Investment Advisor Representative using the Investment Advisor Public Disclosure website, you will see that many investment advisors have what is called "Outside Business Activities" - which may include being an insurance agent or other business interests. (However, that would not stop prosecuting attorneys and/or regulators from levying the charge that one violated their fiduciary duty in making inappropriate recommendations.)
David, are YOU a fiduciary?
I am a life insurance and annuity agent (and I am an IAR for an RIA; please see above). For my current licensing, I am "a fiduciary". I AM a professional and I consider myself a Fiduciary Educator. Unfortunately there is no regulatory definition of a "professional", so please allow me to showcase my definition.
I think there are three kinds of advisors out there:
Product-Peddler: This person is easy to spot, because all they want to do is tell you about their latest and greatest product, how great it is, and almost without regard for your 'needs', simply ask "how much of this product do you want?" This person may take a "financial inventory" to ensure suitability, but that is not the same thing as a "Discovery Interview". This person is motivated purely for the desire to sell, move product, and maximize commissions. (No one wants to be served by a product-peddler.)
Compensation: Compensation is generally based on commissions of product sales. Not a bad thing, but it's HOW they go about generating these product sales - almost ignoring the client's total picture and just wanting to sell the highest commission product.
Fiduciary Advisor: This person touts how much "better they are" because "I'm a fiduciary" so "you can trust me". They abhor commissions because they think they're going to get drunk on them and become like the 'product-peddler' - like Dr. Jekyll and Mr. Hyde - and demonize anyone else who is compensated by commissions by positioning them as an "evil commission earner". They'll still use processes and software to help make planning recommendations, but they say that they are better because of their duty and compensation arrangements.
Compensation: Compensation is "pay as you go", often up to 2-2.5% of your total assets, regardless of performance.
Think about it: If you invested $500,000 in such a program for 10 years... you would have paid $100,000 - $125,000 in total fees over 10 years!!! (Whose best interest does THAT serve?)
Professional Standard: This is a professional who is disciplined in ensuring that the products they sell are properly vetted before even offering them. This professional studies their products and advantages (and disadvantages) to ensure that they fit their clients needs (or if they don't). They still offer professional processes (such as a discovery interview), utilize software programs, AND may even put their recommendations in writing! They work in the best interests of their client WITHOUT fiduciary contracts or charging out of pocket fees for their work.
Compensation: Compensation is based on commissions, but only for selling products and solutions that work, based on your needs as uncovered in a discovery interview.
Money Management vs Product Solutions: The Great Debate
Hopefully you've read my blog post from yesterday regarding Morningstar's recommendation for retirees to only distribute 2.8% of their retirement portfolio to have a 90% chance of not running out of money... while inadvertently charging up to 2-2.5% per year to do it!
Let me think about this: Live on less... charge me almost as much for the privilege... and I STILL have a 10% chance of failure that I would run out of money???
That arrangement and plan... stinks!
But yet, I have an annuity product that would guarantee a 5% lifetime income for ONE person (4% for two people) from the age of 65 and would charge less than 1% per year! (Actually, some have income benefit riders with NO fee!)
Even if I ran out of money... I wouldn't run out of income!
If maximizing your lifetime income from your retirement assets was important to you, would the 10% possible failure plan make sense to live on 2.8%... or would enjoying 5% of your assets and having it guaranteed for life be a better plan?
But I gotta tell you: If you decided on that plan... I'm going to earn an 'evil' commission! And yet, that commission-based product might make FAR more sense than the alternative plan, right?
I hope you can see that the overuse of the term "fiduciary" has really resulted in NEW MARKETING HYPE that serves to demonize those who are not "like them". Use the advisor that uses the best processes and helps you to clarify problems and present solutions that make sense for your situation. The advisor who communicates concepts in clear language and allows you to make decisions that feel right to you. THAT is a true professional - regardless of licensing or "fiduciary duty". In general, if someone is "over-hyping" how "good", "moral", or "pure" they are... it's usually a good warning to be cautious. They may be that good... or they may not be. Remember: Bernard Madoff... was a 'fiduciary advisor' too.