If you were buying a home, you probably wouldn’t want a Realtor who showed you only the houses listed by his company. Pretty soon you’d find yourself asking, “What about this place with the pool? Or this one with the walk-in closet? That’s what I really want.” And if he couldn’t accommodate you, you’d quickly find someone who could.
When is a 'Fiduciary' Truly Acting as a Fiduciary?
It wouldn’t matter if he was nice. Or if he worked for a well-known real estate firm. You’d want him to find homes that fit your needs and price range, and to give you as many options as possible.
I often wonder why people aren’t as demanding about their investment choices.
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Are You Working with a ‘Captive’ Adviser?
I understand that folks feel secure when they go with brand-name broker-dealers — the ones that have quality TV commercials, tall buildings downtown, perhaps even their name on a stadium. And I’m sure some investors just feel more at home at their local bank, or they like the convenience of using the financial services offered there.
It’s possible most aren’t even aware the person they’re working with at the bank or the big brokerage company is what’s known as a “captive” adviser — a financial professional who is a registered representative of the firm for which he works, and who typically can recommend only the products offered by that firm or those that they allow on their platform. Which means the things he suggests will be suitable for his clients’ needs, but not necessarily the best possible options, because he simply might not have access to the best solution.
He might tell you what he’s selling is superior — but, of course, he’s a bit biased. The licensing a captive adviser works under doesn’t require the more stringent fiduciary standard, which says the adviser must act solely in the client’s best interests. A captive adviser may have good intentions — but he also has limitations. If he can’t give you what you want, he’ll give you what he has. After all, he still has to make a living.
A Better Way to Go
Which is why a major shift is going on in the industry toward truly independent advisory practices.
Independent advisers offer investment products from a number of companies. They don’t get a bonus or a corner office based on revenue-sharing quotas. And they don’t limit their recommendations or suggest strategies based on a list of products built by their bosses; they look at everything available to determine the best fit for the client. That’s where their loyalty lies.
I know it can be difficult to tell the difference between these types of firms and their advisers. It always has been — and the jumble of letters we put behind our names (CFP, CFA, CFS, etc.) doesn’t mean much to anyone outside the industry. It also doesn’t tell you whether you’re working with an independent adviser, who has your best interests in mind.
Fiduciary Rule Basics for Investors
The push for better disclosure statements and to make the fiduciary obligation to clients an industry standard has, unfortunately, muddied the waters even more. Firms that use the word “independent” in their name or on their marketing materials are not always completely self-contained. In many instances, they are “independent” practices of another firm. Think of it like owning a McDonald’s franchise: You still have to sell burgers even if your customers want sushi; however, you are an “independent” franchise.
Of course, the most important thing is to find an adviser you trust. Some important factors to keep in mind:
- Do you feel confident that he is looking out for your best interests?
- Does he have a passion for the work?
- Is he persistent?
- Do you get along?
- Does he answer the phone and your emails?
The Question You Always Want to Ask: Why
But your adviser also should be capable of explaining why he picked a particular fund or strategy and whether there was a commission involved or some other motivation for the choice.
Open your statements and look past the bottom line. Read the fine print on disclosures. Ask what licenses your adviser holds and whether he and/or the firm is an independent Registered Investment Adviser, registered with the either the Securities or Exchange Commission (SEC) or state securities authorities.
Finding the right products and strategies to build your nest egg is obviously crucial to your financial success. But hiring the right person to help you make those decisions — with the most choices and the fewest conflicts — is every bit as important.
Kim Franke-Folstad contributed to this article.
Financial Advisers: Don’t Follow the Rules, Follow the Principle
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
Some commission-based advisors are affiliated with a brokerage or insurance company and recommend those products exclusively or almost exclusively. Other commission-based advisors are independent, meaning they can recommend products from any financial company. Either way, they are paid to sell.
Is my financial advisor independent? ›
If you've already got a financial adviser and you're not sure if they're independent or not – just ask. They should be able to clearly explain whether they are independent and if they are restricted, the nature of the restriction. You may want to use a restricted adviser in some instances.
Can you trust your financial advisor? ›
An advisor who believes in having a long-term relationship with you—and not merely a series of commission-generating transactions—can be considered trustworthy. Ask for referrals and then run a background check on the advisors that you narrow down such as from FINRA's free BrokerCheck service.
Is it better to go with an independent financial advisor? ›
You should always verify your advisor and their firm, and ask questions about anything that might concern you. You should be comfortable with where your money is kept and who is managing it. Ultimately, the decision to work with an independent advisor or a large firm often comes down to personal preference.
When can a financial adviser use the term independent? ›
Independent advisers can recommend financial products spanning the whole of the market. This means that their advice is unbiased and unrestricted. Restricted advisers can only recommend products from certain providers. In some cases, they will recommend products from a single company.
Do financial advisors have control of your money? ›
Under the rule, financial advisors have custody of client assets when they hold client funds “directly or indirectly” or have the “authority to obtain possession of them.” This includes deducting fees from a client's account.
Are financial advisors honest? ›
One easy way to ensure you're working with a trustworthy financial advisor is to choose a professional who is already required to act as a fiduciary. Financial advisors who are registered with the SEC are required to have a fiduciary duty to their clients.
When not to use a financial advisor? ›
Here's when you may want to forgo a financial advisor and do it yourself: You're confident in managing your own investments: If you are comfortable selecting and managing your own investments, you may not need a financial advisor.
What are the disadvantages of using an independent financial advisor? ›
Disadvantages of a Certified Financial Adviser
Perhaps the most significant concern of hiring a financial adviser is that they don't always have your best interests in mind. Despite many advisers making decisions that will benefit the client, it is not unusual for conflicts of interest to arise.
Should you put all your money with one financial advisor? ›
If you are just starting out and looking to build an investment portfolio, you may be better off using only one investment advisor. In the beginning, your portfolio may be limited to fewer investments belonging to the same category in terms of tax, contribution rules, etc.
Those who use financial advisors typically get higher returns and more integrated planning, including tax management, retirement planning and estate planning. Self-investors, on the other hand, save on advisor fees and get the self-satisfaction of learning about investing and making their own decisions.
Why do financial advisors go independent? ›
A move to independence can provide more opportunity for growth, both organically and inorganically. With the freedom to provide emerging solutions to clients, for example, advisors can acquire more assets from existing clients, as well as attract, develop, and retain new clients.
What is a rule 3 financial adviser? ›
What does Rule 3 adviser mean? This usually refers to the financial adviser to the offeree board. Rule 3.1 requires the offeree board to obtain competent independent advice on the terms of any offer.
What is the difference between a financial advisor and an independent financial advisor? ›
Independent vs.
What differentiates an independent financial advisor from a non-independent advisor is the fact that the former is able to operate completely on their own, without influence, oversight or rules from a larger entity.
How do I know my financial advisor is legitimate? ›
Visit FINRA BrokerCheck or call FINRA at (800) 289-9999. Or, visit the SEC's Investment Adviser Public Disclosure (IAPD) website. Also, contact your state securities regulator. Check SEC Action Lookup tool for formal actions that the SEC has brought against individuals.
What is the difference between independent and non independent financial advisors? ›
Being fully independent means having no affiliation with a product or firm like a bank, brokerage or insurance company. Meanwhile, financial advisers who are not independent will work for a larger firm and may have to put that firm's interests ahead of their clients.
How do I know if I am financially independent? ›
Signs of Financial Independence: Independent Budget: You can cover your living expenses—rent, utilities, groceries, and transportation—without relying on your parents. Debt-Free Living: You've paid off or significantly lowered debts like student loans or credit cards, proving you manage your finances responsibly.
