People often ask me, “Are you a fiduciary? While I believe I understand the intent of why they are asking this question (recently there have been a lot of TV commercials announcing what this means), the meaning of trustee is a little more complicated than this simple question.
Some people may have also read that many “so-called” financial advisors do not have to work in the best interests of their clients (like a fiduciary does). You see, most advisors are employed by a company, whose interests they are paid to represent.
To make matters worse, many people simply refer to any financial professional as a financial advisor. Let’s start by distinguishing between non-fiduciary, but proper, and fiduciary registrations.
A “suitable” registered representative
A registered representative, aka stockbroker or dealer for short, buys and sells securities for his clients. As many things were bought, cars, washing machines, etc. they are paid through a commission. They are held to a suitability standard, which is lower than the fiduciary standard. You can go to BrokerCheck to find out if someone is a Registered Representative.
What is a Fiduciary Investment Advisor Representative?
In contrast, the term investment adviser (also spelled as “advisor” see below) is a legal term that refers to a person or company registered as such with the Securities and Exchange Commission (SEC) or a state securities regulator.
To find out if you are working with an investment advisor representative, you can go to the Securities Exchange Commission Investment Advisor Public Disclosure Database.
Representatives and Representatives of Investment Advisors may hold advanced designations which are not necessarily fiduciary. The Chartered Financial Analyst or CFA is considered the first investment credential. That said, unless the Chartered Financial Analyst holds Series 65 registration, they are not held to a fiduciary standard.
In the investment industry, a true fiduciary works in the best interests of their clients. The Fiduciary Center of Excellence and The Center for Fiduciary Studies define a trustee as “a person who provides investment advice or manages another person’s assets and is in a special relationship of trust, trust and/or legal responsibility.”
A fiduciary puts the interests of his client before his own
Passing the Series 65 exam is not the end
At the most basic level, representatives of investment advisers (not advisers) who pass the uniform examination on the law relating to investment advisers (Series 65 Review), are held to this standard. These representatives work in companies called Registered Investment Advisors. Thus, the company is also a fiduciary.
I liken registering for the Uniform Investment Advisor Law Exam to “just jumping the hurdle,” but not by much. After passing the Series 65 exam, an investment advisor representative does not have to earn continuing education credits to further their knowledge, such as the Certified Financial Planner designation. In these cases, those seeking this designation have done a lot more work than just “clearing the hurdle”.
The Uniform Law Examination for Investment Advisors is an examination about law, not about investing. Although not required, some professionals may hold a degree in finance, have an investment designation such as Chartered Financial Analyst.
An impressive title like Vice President on a business card does not indicate investment knowledge. You may have heard the term assets under management or AUM. It is simply an indicator of the volume of money the advisor or often their business is managing. This does not indicate how their risk-adjusted returns compare to those of other companies. More importantly, their effectiveness in providing clients with risk-adjusted returns tailored to their goals
Fortunately, FINRA has a page to help you learn more about Professional designations. They even have a page for so called “accredited designations”. These 11 appellations have been certified either by the American National Institute of Standards or the National Commission of Certifying Bodies.
However, the Financial Industry Regulatory Authority does not approve any designation. You should therefore do your own research to determine whether a titled or untitled professional suits your needs.
Double registered: fiduciary and non-fiduciary status
Confusing things a bit, some investment advisor representatives are also registered as registered representatives. An argument for this dual sign-up is to allow for more options to show customers and the ability to support smaller account sizes. However, it allows them to move back and forth between fiduciary and non-fiduciary status. This often leads customers to be confused when the fiduciary light is on or off.
This double registration is accompanied by the title of registered representative. In this case, the Registered Representative aka Financial Advisor will most often sell a mutual fund, which includes an embedded commission. The distinction between “commission” and “fees” (which is more transparent) is the beginning of the confusion. Many people often see the fees as an additional cost, compared to those who don’t see the cost, the commission and feel like they’re not paying anything.
The fiduciary definition of a Certified Financial Planner (CFP) is important
A Certified Financial Planner (CFP) takes a 12-hour exam and spends three years providing financial planning services to clients BEFORE they qualify for this designation. Depending on the year they obtain this designation, they must also hold an undergraduate degree. I
With the CFP certificate, a counselor must not only pass the board exam and qualification tests, but also undergo 30 hours of continuing education every 2 years to improve their knowledge. the Certified Financial Planner® is the only accredited designation that some states consider meets their investment advisor representation requirements.
If your planner claims to be CFP, you can (and should) check that, while determining if there are any flaws in the person’s record. The Certified Financial Planner Board of Standards requires a CFP to act as a fiduciary in all transactions. This can help you navigate the potential conflicts that arise from the blurring of lines that I also noted earlier.
The CFP Pros undertake to honor a Standards of Conduct this includes At all times when providing financial advice to a client, a CFP® professional must act as a fiduciary and, therefore, act in the best interests of the client. Although they may be dual registered, they are committed to disclosing and managing conflicts of interest
What’s in a name? When it comes to the term financial advisor, we find that there are many interpretations as well as many regulators. It is best to clarify which registrations, licenses and professional designations your person has. A
s Ronald Reagan once said, “Trust, but verify”. We have given some verification routes to help you get started. It may be a good idea to check credentials from time to time as records may change.