A Breach of Trust....Either You Are a Fiduciary, or You Are Not.

Scott Peterson |
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A Breach of Trust....Either You Are a Fiduciary, or You Are Not.

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their client’s interest above their own in all instances. Being a fiduciary requires being bound, both legally and ethically, to act in their client’s best interest. In essence, they are the guardians of their client’s money.

Commissioned salespeople are not considered fiduciaries because they are representing a product or a company, not the individual to whom they are selling a product, and they are not bound by the higher ethical standard of a fiduciary. Commission salespeople follow a different suitability standard in which the transaction must be suitable for a client, not necessarily the best solution. The commissions they earn can create a huge conflict of interest which effectively eliminates them from the fiduciary standard.

All too often, individuals trust advisors that promote themselves as fiduciaries, only to get talked into buying high commission/high fee annuities or real estate investment trusts by these same advisors as these advisors fail to live up to fiduciary standards. Sadly, many investors fall prey to the unethical, yet legal, practices of financial advisors who promote themselves as trusted fiduciaries as a door opener to selling expensive, inappropriate, big commission products to the unsuspecting public.

Unfortunately, investment advisors are allowed to wear multiple hats at the same time, which allows them to be fiduciaries for a part of a client’s money that they manage, and a commissioned salesperson for the balance of the client’s money. It is not right, it makes no sense, but that is how it works.

Who regulates, or better said, doesn’t regulate this?

The Securities and Exchange Commission (SEC) typically oversees the activities of the fee based fiduciary while another regulator, the Financial Industry Regulatory Authority (FINRA) oversees the activities of the broker-dealers who are typically those persons and firms that are commissioned salespeople. Additionally, the State Insurance Commissioners oversee the sale of commission paying insurance products such as annuities within their respective states. The problem lies in the fact that the SEC is only interested in the activities of the advisors relating to the advisor’s roles as fiduciaries and does not pay any attention to the non-fiduciary sales activities that are being carried out by the advisors. So, the sale of commissioned securities and insurance products by a fiduciary is not their concern as they view these activities outside of the scope of their jurisdiction. The deception takes place when advisors advertise themselves as fiduciaries, draw clients into their offices, then act as fiduciaries for a small amount of the client’s assets (10%) and proceed to sell the client big commission products that are not in the best interest of their clients with the rest (90%) of the client’s money.

As I listen to the radio and see advertisements online, it is usually these bait and switch types of advisors that are promoting themselves as fiduciaries. Buyer beware, you need to do your homework.

So, how does one distinguish between a true fiduciary and a person or entity that is a fiduciary in name only that is poised to sell you inappropriate, high commission products?

First, check out the firms Form ADV and CRS. Form ADV and CRS are the uniform documents filed by investment advisors to register with the SEC. They will let you know how a firm is compensated and will identify conflicts of interest such as receiving commissions in the sale of investments and/or insurance products. You can find a firm’s Form ADV and CRS on the SEC website www.adviserinfo.sec.gov. If the firm, or advisor you are investigating, earns a commission by the selling of an investment or insurance product then I would suggest avoiding that advisor. They may be “fee based” which means they act as a fiduciary for some of the client’s money they manage but in the end, they are commissioned salespeople.

Second, know that any product that has a surrender charge, or limits your access to your own money, pays a commission to a salesperson. When an insurance agent sells an annuity they get paid an upfront commission typically of 6-7%. So, if the agent talks somebody into investing $100,000 in an annuity, the insurance company pays the agent a 6% commission or $6,000. So how does the insurance company protect themselves from losing money on this transaction? Insurance companies place a surrender charge on the annuity that keeps the purchaser from liquidating the annuity for a specified number of years, or at a large cost if the annuity is surrendered prior to the when the stated surrender charge expires. This allows the insurance company to recoup the upfront $6,000 commission they paid by collecting large management fees for a number of years or the investor reimburses the insurance company in the form of a surrender charge if they surrender the product early. You are unlikely to get stung as long as you never place your money into a product that charges a fee to withdraw your own money or that imposes a timeframe that limits your ability to withdraw your money.

Third, simply search google for a list of “fee only” investment firms in your area. “Fee based” advisors are not always true fiduciaries as part of their income comes from selling commission paying products. Fee only advisors are compensated by an agreed upon fee and don’t accept, or are even licensed to receive, commissions.

Unfortunately, I don’t see the regulatory environment changing anytime soon and vulnerable investors will continue to be duped by advisors, who claim to be fiduciaries but fail to act as fiduciaries by selling high commission investments and annuities to the public. This travesty will continue as long as the multiple regulatory bodies and insurance commissioners limit their focus on their own perceived jurisdictional responsibilities while ignoring the big picture of what is taking place with the client’s investment portfolios.

If you want an advisor that is truly a fiduciary, one that always acts in your best interest, then it’s critical to understand the potential conflicts of interest that exist in the investment industry before hiring any advisor. My best advice is that you should limit your search for a fee only advisor whose investment philosophy matches your own.