Are you really getting a straight answer when you ask your financial advisor, “Are you a fiduciary?"

August 06, 2021

Let me start by giving my own opinion on this question: No. This may be concerning to many who read this viewpoint. I’m willing to say, I’ve even lost a few prospects due to my honesty when answering this question. 

So what does it mean to practice as a fiduciary when you are a financial advisor? I found this description by US News in an April 2021 article (What is a Fiduciary Financial Advisor) to be fitting: “A fiduciary is a person or legal entity, such as a bank or financial firm, that has the power and responsibility of acting for another (usually called the beneficiary or principal) in situations requiring total trust, good faith and honesty.” In other words, your advisor is engaged by you to act in your best interest when it comes to the planning and implementation of your financial goals.

That begs the question: How do you know the financial advisor you’ve hired is actually acting as your fiduciary? The answer: You don’t. There are legal guidelines in place to protect consumers, but your advisor can recommend several products that benefit their respective firms and paychecks more than they benefit your wealth management needs. Many times, ramifications for advisors not acting in a fiduciary capacity are enforced after the damage is done. There are no enforcement agents digging deep into every transaction and product recommendation as we make them to clients.

How can you hold your advisor accountable? Consider the following guidelines:

  • Question how the recommendations were formulated: Were they based on a simple risk profile questionnaire, or was a comprehensive financial plan in place? If there is no plan in place, how can a true fiduciary actually recommend a solution?
  • Ask your advisor how much compensation the firm is retaining vs. how much the advisor takes home. If they don’t want to answer this question, move on. Why is this important? Because many firms incentivize their advisors to gather assets and sell firm products. They do not encourage actual advice or ongoing monitoring. In other words, they are a salesforce fronting as a fiduciary. This, in my opinion, is likely not uncommon amongst many high profile wealth management firms.
  • If your advisor is working independently, ask them what their primary revenue source is for supporting the firm. If they receive hourly fees or do flat-fee planning, that can be a good sign. They are not compensated on just the product, but the actual advice. If they are incentivized by only asset management or insurance sales, are they truly going to provide a recommendation that doesn’t lead you to one of those solutions? I touched on this in a previous blog post: https://www.alterefinancial.com/blog/opinion-3-warning-signs-your-financial-firm-not-be-acting-as-your-fiduciar.

In summary, asking a financial advisor if they are a fiduciary is not enough. There is leg work that needs to be done on your end--including discovering how that advisor is compensated--to truly understand if the advisor is putting your interests ahead of themselves and/or their firm.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.


The opinions expressed in this article do not necessarily reflect the views of LPL Financial.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.