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Is Your Financial Advisor a Fiduciary?

By Harry S. Margolis

When you consult with your financial advisor or planner, does she put your interests first, or is she simply under an obligation to sell products that are “appropriate”? If you don’t know, ask.

The Fiduciary Rule

You may be surprised to learn that there’s no law or regulation requiring financial advisors to put their clients’ interests first, especially after you’ve divulged all of your private financial information. That said, many financial advisors take on this duty voluntarily.

This has been in the news recently because the Labor Department created the so-called “fiduciary rule” requiring that when advising on retirement plan assets advisors must put your interests first. Unfortunately, this rule doesn’t go into effect until April and there’s a risk that the new Trump administration or Congress will block it.

Why does this make a difference? Let’s assume that it makes sense for you to purchase an annuity, and there are two available, one that pays more to you but a lower commission to the broker and another that pays out less to you and gives the broker a higher commission. Without the fiduciary rule, the broker can recommend the second annuity and not tell you about the first one. There’s no bar to this as long as the annuity is “suitable,” a vague term which means that it’s okay for someone in your position to purchase an annuity even if it’s not the best available for you.

Or you may have funds to invest. Does your advisor recommend that you invest in low-cost index funds or in high-cost managed mutual funds for which he’s paid a commission? Without the fiduciary rule, it’s up to each advisor.

Even if the fiduciary rule for retirement plans is not repealed or blocked, it does not apply to advice you may receive for your non-retirement assets. For those, you are on you own in making sure that you receive advice in your best interest.

Trend Toward Lower Costs

Many more investors are moving towards lower-cost platforms. Last year, they moved $375 billion into exchange-traded funds. This is because they have come to realize the cumulative cost of spending more. If you pay just 1 percent more per year for your savings and investments over a 40-year career, you could have as much as 40 percent less at retirement. (I realize that this may overstate the cost, since you won’t have invested most of the funds for a full 40 years, but on the other hand it doesn’t count the lost benefits of compounded earnings on the extra 1 percent paid out each year.)

In addition, Silicon Valley has gotten into the game with automated financial planning programs such as Betterment, Personal Capital and Wealthfront. As a result the number of financial planners has dropped more than 10 percent in the past 10 years.

Choosing a Financial Planner Who Works for You

So, you may wonder why use a financial planner at all. The answer is that they do a lot more than simply pick investments. They provide specific advice on tax planning, saving for college, planning for retirement, and getting to the bottom of your financial assets and needs. For Baby Boomers, they can help you determine how long you need to work, what you need for retirement, whether you can live on a lower income, and how much you can afford to give to your children and grandchildren, or to charity. Protecting you from a single financial mistake can more than make up for their fee, and they’ll probably save you from several.

So how do you find a financial planner who puts your best interests first?

  • First, ask around. Friends, family and other advisors, such as your attorney or accountant, can recommend good people with whom they have worked.
  • Second, ask how they are compensated. They may receive commissions on selling products, charge a percentage of the funds they manage, or charge a fixed or hourly fee. There are good people in all three categories, but those surviving on commission must overcome an inherent conflict of interest. Most of those charging a fee for services operate as fiduciaries. One source of fee-only financial planners is the National Association of Personal Financial Advisors.
  • Third, determine whether the advisor is a Certified Financial Planner or CFP. To qualify for this designation, advisors must complete certain educational requirements, pass an exam and comply with ethical obligations administered by the Certified Financial Planner Board.
  • Fourth, ask whether the advisors you are considering are fiduciaries.

If you take these steps, you will have the information you need to choose among the candidates you’re considering.

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