The Investment Scientist

A Balanced Portfolio to Avoid (III): Most Financial Advisors Are Not Fiduciaries!

Posted on: April 30, 2011

My friend is a savvy businessman. However, like most Americans, he has a misconception: he thinks financial advisors are legally bound to put clients’ interests first. This can not be further from the truth. Everybody and his grandma can be a “financial advisor.” Unlike being a “physician”, there are neither legal requirements no educational qualifications. Whether a certain financial advisor is bounded legally to act in his client’s best interests all depends on his true profession. Here is an ad hoc summary:

Professional Title Fiduciary?
Attorney Yes
Certified Public Accountant (CPA) Yes
Registered Investment Advisor (RIA) Yes
Financial Planner Maybe
Certified Financial Planner (CFP) Maybe
Wealth Manager Maybe
Insurance Agent No
Registered Representative No
Stock Broker No

Isn’t it confusing that all of the above may call themselves financial advisors? The professions in green are bounded by law to act as fiduciaries. The professional titles in blue are similar to “financial advisor”; they are hats that people wear. The professions in red are emphatically not fiduciaries. Their first loyalty is to their firm, where it should be. To disguise their true color, however, they usually wear one of the blue hats.

When in doubt, ask them these questions:

  1. Are you legally bound to act in my best interest? If yes, can you put that in writing?
  2. Will you disclose all conflicts of interest in writing?
  3. How are you compensated? Will you disclose that in writing?

If they are not willing to disclose these things in writing, they are not a fiduciary. A fiduciary would have no qualms about answering those questions in writing.

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4 Responses to "A Balanced Portfolio to Avoid (III): Most Financial Advisors Are Not Fiduciaries!"

Great info. Worth keeping in mind when the 401k rep shows up and starts making all kinds of recommendations!

“CFP professionals shall at all times place the interest of the client ahead of his or her own”

Found at http://www.cfp.net/certificants/ethics.asp under “Acting in the Best Interests…”

CFP’s drop the designation because they want to NOT be held to the fiduciary standard and simply want to use the suitability standard. I believe that CFP is not in the “maybe” group, but in the “yes” group as much as the others.

If there is a CFP not acting as a fiduciary, report him/her and they will lose the certification.

And to get to the nuts and bolts of it, no group up there is 100%. There are always folks skirting around the fiduciary standard of care.

It might not be in the clients best interest to pursue litigation against XYZ Corp, but then the attorney doesn’t get to bill $250/hour. Think of all of the examples, that happen every day.

There are ethical and unethical people no matter the business or standard and unfortunately there is no measurement to determine who is the ethical person and who is not. To purport that there is, like fiduciaries are just naturally ethical, is just false. There are many individuals out there that are ethical but may not be a “legally defined” fiduciary. And there are many “legally defined” fiduciaries that are unethical. So a fiduciary may be a good start but it is not the end all.

Well said Josh.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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