In the previous two pieces in our series, “Doing Due Diligence on Your Financial Advisor,” we offered some ideas on how to check out an adviser’s background, and why we would suggest that the first hurdle to overcome when selecting an adviser is to ensure his or her advice is of the highest, fiduciary standard.

Final Words on Finding a Fiduciary First, the difference between fiduciary vs. suitable advice bears repeating: Merely suitable advice does not have to be the best advice for you; it is assumed to contain conflicts of interest. One way to determine whether your adviser will be acting as your fiduciary is to ask these two essential questions:

  1. Will your relationship with me be only and always as my fiduciary adviser? Take no less than an unqualified “Yes,” with no ifs, ands or buts. Some advisers are dually registered, which means some of their advice is dispensed with a broker/suitable hat on and other advice is delivered in a fiduciary role. If someone will not or cannot agree to always act in your best interest under all circumstances, of what worth is the advice?

  2. Will you agree to a fiduciary relationship in writing? How reliable are verbal assurances if an adviser won’t agree to the same in writing? For example, here is a simple but powerful fiduciary oath from fi360, an advocate for excellence among financial service providers. In our estimation, any adviser worth heeding should be happy to sign such an oath.

Complementary Qualities for Your adviser Relationship Beyond accepting a fiduciary duty, there are other ways that advisers can best position themselves to sit on the same side of the table as you and your financial interests. Business Structure: The Registered Investment adviser Firm By law, independent Registered Investment adviser firms must provide strictly fiduciary advice to their clients. In contrast, brokerages, banks, insurance agencies and other transactional businesses more typically offer suitable advice. Regulatory Agent: Seek State or SEC Oversight When a firm and its team of advisers are providing only suitable advice, they may not go out of their way to tell you so. A short-hand approach to sorting out the players is to determine which financial regulator oversees the firm by checking their fine print.

  • Registered Investment adviser firms are regulated either by the U.S. Securities and Exchange Commission (SEC) or by their state, depending on firm size (as measured by assets under management). These firms have a fiduciary duty to their investor clients.

  • Brokerages and other transactional businesses are regulated by the Financial Industry Regulatory Agency (FINRA) and are more likely providing only suitable advice.

  • If you see references to both FINRA and the SEC in a firm’s disclosures, that’s the calling card of dual registration. When it’s easy enough to find a fully fiduciary adviser, why complicate things with potentially dueling interests?

Compensation Arrangements: To Whom Is Your adviser Beholden? Speaking of potentially dueling interests, another way to determine how well your adviser’s interests are aligned with yours is by determining his or her sources of compensation. If your adviser is receiving commissions from third-party sources, suffice it to say he or she is exposed to conflicting incentives to recommend particular products or transactions that may not be in your best interests. In addition, these conflicts and their resulting costs (which silently drag on your returns) often remain undisclosed to you. A transparent, fee-only arrangement is preferred. First, you can clearly see what you’re spending in exchange for what you’re receiving. Second, if your adviser’s only compensation comes from you, it enhances his or her ability to offer the impartial, product-neutral advice you deserve. A fee-based arrangement warrants further inspection. Fee-based advisers are receiving your fees, plus commissions from others. If the adviser is entirely fee-only, except he or she can write insurance policies for you as needed to protect your primary investments (with full disclosure of all commissions being received for this singular activity) then a fee-based relationship may still complement your best interests. If the commissions are coming from investment activities, the same conflicts arise as those described above for a fully commissioned adviser.

View other articles in the Due Diligence Series

Doing the Due Diligence on Your Financial Advisor -- Part I: How Do You Know? Doing Due Diligence on Your Financial Advisor Part II: First There Is Fiduciary

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