Unless you rely solely on streaming services, at some point in recent years, you have likely seen Tom Selleck pitching reverse mortgages as a retirement strategy. Is that a product for you? Or your parents? This article won’t answer that question. The best person to answer that question for you is a financial advisor who is also a fiduciary—someone who puts their client’s interests ahead of their own.
Many people assume that all financial advisors are fiduciaries. But that is not always the case, and knowing the difference matters. Fiduciaries have a legal obligation to act in the best interests of their client—even if it means placing the client’s interests ahead of theirs. Therefore, a fiduciary must disclose any conflicts of interest and must resolve them in the client’s favor.
To better understand this distinction, some definitions are in order. The term “financial advisor” is a broad one and does not have a set definition—meaning anyone can call themselves a financial advisor and offer financial advice. Some “financial advisors” offer financial advice in a specific field—insurance, annuities or tax, for instance. “Financial planners,” however, are financial advisors who offer a comprehensive financial plan that generally addresses a client’s short-term and long-term savings strategies, investments, life insurance, tax planning, estate planning, retirement planning, strategies for paying for college and other goals.
“Certified financial planners” are financial planners certified by the CFP Board, which requires applicants to earn a bachelor’s degree and complete coursework through a CFP Board Registered Program. When providing financial advice to a client, a CFP® professional must also act as a fiduciary under the CFP Board’s Code of Ethics and Standards of Conduct.
Under the Investment Advisers Act of 1940, “being in the business of giving investment advice for compensation,” triggers the need for a financial planner to register. Therefore, before any financial advisor, CFP or not, can earn compensation for investment advice, that person must become an Investment Advisor Representative (IAR) of a Registered Investment Advisor (RIA). An RIA is the business entity that must be registered either with the primary state in which it does business or with the SEC, while the IAR is an individual who works for the RIA. (Note that the 1940 Act spells it “adviser” rather than the more-common and also-correct “advisor.” While some use “adviser” to signify they are registered under the Act, whether someone calls themselves an “advisor” or an “adviser” tells you nothing about whether a person is a fiduciary.)
IARs in most states must pass the Series 63 and/or Series 65 exams or, alternatively, if coming from a broker-dealer background, the Series 66 and Series 7 exams administered by the Financial Industry Regulatory Authority (FINRA). Some states will waive these requirements if the professional has an advanced certification such as the CFP. IARs are fiduciaries. Many financial advisors are both IARs and CFPs.
The best way to determine whether a financial advisor is a fiduciary is to ask. It is also wise to check the background of the investment professional on FINRA’s BrokerCheck. There, you can find out what exams the person has passed, their years of experience, their state licenses, and whether they were the subject of a final regulatory action or certain complaints.
In the past, broker-dealers did not have a fiduciary duty to retail clients. Instead, they could make investment recommendations solely if the investments were “suitable” for the client. But in 2016, the White House Council of Economic Advisers found that conflicts of interest resulted in a 1% point lower annual return on retirement savings and $17 billion of losses every year for America’s families. As a result, under the Obama administration, the Department of Labor attempted to require all retirement advisors to act as fiduciaries, but that rule was hotly contested by many in the industry and ultimately defeated in court.
In June 2019, however, the SEC adopted rules and interpretations designed to enhance the protections afforded retail customers in their relationships with broker-dealers and investment advisors. Regulation Best Interest, or Reg BI, which the SEC implemented under the Securities and Exchange Act of 1934, requires broker-dealers to act in a retail client’s “best interest” when making a recommendation on any securities investment or investment strategy involving securities. In other words, Reg BI prohibits broker-dealers from putting their own interest ahead of their retail customer’s interest. Reg BI went into effect in June 2020, but the SEC did not bring any enforcement action until two years later. FINRA followed suit last October with its own disciplinary proceeding to enforce the rule.
Even with the SEC’s rule, a dual-hatted financial advisor (one who acts as both a financial planner and a broker-dealer) can still make commissions off investments but must disclose this potential conflict to the client. And the investment still must be in the client’s best interest—not the advisor’s.
To be clear, there are plenty of financial advisors who are not fiduciaries who do a fantastic job at managing their clients’ wealth. And simply being a fiduciary does not necessarily mean that one is getting the best financial advice. What is most important is that those seeking financial-planning services understand the different standards those offering such services are subject to, ask questions to ensure that the advice they are given is right for their needs, and—ultimately—that they trust the person giving them that advice, regardless of whether he or she is a celebrity.
Related Attorneys
Partner
