Battle Lines Being Drawn Over Fiduciary Status of Financial Advisors

There is a key point of distinction that exists in the world of financial advice and vast majority of people are unaware that it exists. 

The defining issue is whether a financial advisor actually assumes the role of fiduciary.  Fiduciary responsibility is important because it basically means that a financial advisor is legally obligated to act in the best interests of their client at all times.  In other words, fiduciaries are required by law to put your interests before their own or those of their firm.

The notion of fiduciary responsibility may appear odd given what has played-out over the past couple of years.  The reality, though, is that many financial advisors are not fiduciaries.  For example, advisors in the securities world who work at some of the well known brokerage firms—despite the fact that they are able to offer fee-based accounts—generally are not fiduciaries.  In addition, your insurance agents are most likely not acting in a fiduciary role.     

Independent Registered Investment Advisors (RIAs) do act as fiduciaries.  RIAs charge a pre-negotiated fee for their advisory services that is typically a percentage of assets under management, and they cannot earn other revenue from clients without prior written consent.  RIAs also provide their clients with something called a Form ADV.  A Form ADV describes how the advisor does business, explicitly describes compensation, and serves as a form of written consent that prevents any conflicts of interest.

There are literally hundreds of thousands of financial advisors in the United States, and there is very little clarity on the differences that exist.  As indicated in a recent Wall Street Journal article and RAND Corp. report, 63% of investors think brokers are required to act in their best interest and 70% think that brokers must disclose any conflicts of interest.  Neither is true.

The Financial Industry Regulatory Authority (FINRA) governs broker-dealers, the Securities and Exchange Commission (SEC) and some states govern RIAs, and state departments of insurance govern insurance agents.  These regulatory bodies that govern advisors, brokers and insurance agents have begun to at least consider the merits of having all forms of financial advisors assume fiduciary responsibility—particularly in light of the financial crisis.  It would be wise, however, not to hold your breath waiting for this to happen. 

In the meantime, consider looking for an advisor who is willing to assume the responsibility that comes with the role of fiduciary because that person has strong incentives to make decisions in your best interests.  As we have seen over the past several years, quality financial advice is critical and poor advice is catastrophic. 


I am completely amazed that most "advisors" are not required to have the customers best finacial interest in mind at all times. no wonder people are so angry now, as there is no recourse. an "advisor" or broker can sell a variety of products that may make him wealthy but may do nothing for the client. they make their commission whether the investment positively impacts my portfolio or not.

finding an advisor who is a fiduciary should be the #1 requirement when hiring someone. i can't see it being successful otherwise, especially over the long term.

Fiduciary responsibility should be set in the Investment Policy Statement. By law a fiduciary needs to be "prudent". The detail behind that prudence, again, should exist in the IPS to avoid any ambiguity.