What is the Fiduciary Rule and Why You Should Care
When you’re deciding on a financial advisor to guide you on decisions regarding retirement, investments, life insurance, estate planning and the like, you should have a lot of questions prepared. We think the most important questions to ask is this one:
Are you a fiduciary?
What is a Fiduciary?
A fiduciary must always:
- Act in your best interests. When you hire an advisor, they should you put YOU above everything else. Ask: "Do you act as a fiduciary at all times?" The answer should always be yes.
- Avoid or disclose conflicts of interest. Even fiduciaries can have conflicts of interest (for example, someone who manages money for a percentage of assets has an inherent conflict of interest when a client asks if they should pay off a mortgage). But a true fiduciary should avoid conflicts of interest whenever possible, and make sure to disclose any conflicts upfront.
- Communicate clearly with clients. Fiduciary planners won't simply tell you what they think you should do; they will give you the tools and education so that you can make an informed decision yourself.
Broker-dealers, on the other hand, operate differently. They are sales representatives, and while they must make “suitable” recommendations to clients (a less stringent standard), their primary loyalty is to the brokerage for which they work, not necessarily the client. They are also paid by commission, rather than the flat fee charged by fiduciaries. While there are plenty of honest broker-dealers in the business, there are also those who will steer clients toward high commission offerings rather than those charging a low or no commission. For example, a broker-dealer could sell a client a load mutual fund, which charges a commission, while a similar no-load mutual fund may have an even better track record. An advisor acting as a fiduciary cannot do that.
The Council of Economic Advisors estimated $17 billion annually is lost by investors overpaying for investment products. Good salespeople will convince you they're not salespeople. Be firm in making sure your advisor is actually legally committed to act in your best interest, always.
As John Oliver says,
"Think of fees like termites. They're tiny, they're barely noticeable, and they can eat away your f*king future."
Asking the Fiduciary Question
When interviewing a financial advisor, the first question you ask should be if they act as a fiduciary at all times. Ask them if they ever get paid on commission. Then ask them to put their answers in writing. NAPFA recommends asking potential advisors to sign an oath stating they will always act in your best interest (see below). But this can be as simple as a one sentence promise you ask them to sign:
"I promise to put your interests first at all times, and never to accept sales commissions or referral fees."
Beware: any good salesperson will have a smooth answer ready if they aren't a fiduciary:
- "We always put our clients first,"
- "Oh, the company won't let me sign anything without going through compliance,"
- "Our legal team would have to look at anything we put in writing."
But this is a simple question with a simple answer. If they can't sign an oath saying they will put your interests before theirs, you should run, not walk, away, no matter how nice or well-intentioned they seem. Here's our signed promise that we will always act as fiduciaries, using the exact NAPFA oath they recommend: