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The Value of a Fiduciary

Robert Lindstrom

There has been much in the news about fiduciaries recently given that the Trump administration may be considering the delay or repeal of the Department of Labor’s proposed fiduciary rule. As with most news features, it can be difficult to get the whole story and to determine what it means for you. The hope is that this article will help clarify the issue.

The term fiduciary can be defined as a person to whom property or power is entrusted for the benefit of another. For a financial advisor, this means advising clients for their benefit at all times; however, the regulatory environment does not allow it to be this simple. Most financial advisors who claim to be fiduciaries are Investment Advisor Representatives (IARs), regulated by the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. IARs are held to a fiduciary standard, defined as acting in a client’s best interest and disclosing all potential conflicts of interest. This is in contrast to “sales people” who only have to recommend a product—one that usually maximizes their commission—that is suitable for a client.

Muddying the waters even further, financial advisors can be dually registered. This means that someone can offer advice as a fiduciary and then “switch hats” and sell you something that is not in your best interest. For instance, say that you are told that you should open a Roth Individual Retirement Account (IRA) and contribute $400 per month to the account. The same person can then sell you an annuity in that Roth IRA that has high commissions and long surrender periods. Along those same lines, an IAR who “hat switches” can manage one account as a fiduciary and then turn around and sell you a permanent life insurance policy that you don’t need.

Thankfully, there have been various organizations that have tried to help consumers choose the right type of advisor for them, going further than what is dictated by government regulations. The Certified Financial Planner (CFP) Board is one of the most well-known of these organizations. The CFP designation can only be earned through rigorous experience, education, and ethics standards. Even when a person has passed these standards, they still must pass a comprehensive exam to earn CFP marks. CFP designation holders have demonstrated knowledge in financial planning and agree to uphold their own fiduciary standard; however, it is important to note that they can still “switch hats” and sell products for a commission.

The National Association for Personal Financial Advisors (NAPFA) is an organization that goes even further. There are approximately 300,000 people in the United States that refer to themselves as financial advisors, but less than 1 percent agree to the strict standards that NAPFA requires. In fact, the minimum requirement for NAPFA membership is CFP designation, and the association has continuing education requirements that are more robust than what is required by the CFP Board. NAPFA members agree to charge services on a fee-only basis (i.e., no commissions or referral fees), meaning that the only compensation that they receive is directly from their clients. This means that there is no potential for “hat switching” when working with a NAPFA firm, like the Financial Consulate. Perhaps most important, financial advisors employed with the Financial Consulate are required each year to sign a “fiduciary oath,” promising to act in their clients’ best interest at all times, even if it means that the firm will make less money. Because the Financial Consulate is an independent firm (i.e., we do not represent any investment or insurance companies), we can ensure that our clients’ financial interests are our foremost priority.

Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.

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