Deciding to work with a financial advisor can be a stressful decision. It requires sharing intimate financial details with a stranger and implies a deep level of trust that takes time to build. A reasonable assumption would be that the advisor on the other side of the table is required to act in your best interest over their own. In today’s fractured advisor marketplace, however, the simple truth is it is not always so.

What is a Fiduciary?

A fiduciary is a person (or entity) acting on behalf of another party who must put that party’s interests ahead of their own. Typically, people who make financial, medical, or legal decisions on another’s behalf are fiduciaries. Common examples of fiduciaries are found in respected professions including doctors, lawyers, and accountants. An individual acting as trustee of a trust also has a fiduciary duty on behalf of trust beneficiaries, and even corporate officers owe a fiduciary duty to their company’s shareholders. In each of the preceding examples, adherence and infractions are regulated under the rule of law.

A fiduciary must continue to put their client’s interest first, even when it may conflict with their own (i.e. compensation or related benefit). If the conflict is serious enough, it is often not allowed in the first place. For example, divorcing spouses are required to retain separate legal counsel, and medical doctors are not able to receive payments from drug companies for which they write prescriptions.

Is My Financial Advisor a Fiduciary?

The simple answer is “maybe.” In practice, there are two standards of regulation applicable to financial professionals. The first, via the Investment Advisers Act of 1940 (“Advisers Act”), clarifies that individuals or firms in the business of providing financial advice in exchange for compensation owe a fiduciary duty to their clients. The Advisers Act applies to many registered investment advisers (RIAs), including Wealthspire Advisors, who are further regulated by the Securities Exchange Commission (SEC), or relevant state depending on size.

The second, applicable to brokers who work for broker-dealers, is known as the suitability standard. Broker-Dealers are regulated by the Securities Exchange Act of 1934 (“Exchange Act”) and are in the business of trading securities for its own account or on behalf of its customers. Individual brokers are further regulated by the Financial Industry Regulatory Authority (FINRA) and must adhere to the suitability standard. The suitability standard means the product sold only has to be suitable to the customer’s needs, not specifically in their best interest and distinct from a fiduciary standard.

Fiduciary vs. Suitability – What is the Difference?

To compare the difference of suitability vs. fiduciary standards, consider a car salesman who works for a local dealership. The car salesman needs to make sure the car suits your needs and that you qualify for a car loan if applicable. He or she does not necessarily need to ensure the car is at the best price point, that you can afford the purchase, or other relevant factors. He or she likely earns a higher commission consummate with the sticker price of the car. All this makes sense though, because the car salesman’s job is to help you with this individual purchase, not advise you in other areas.

Two standards of regulations for financial professionals sounds confusing, but it was not meant to be. The Advisers Act mandating a fiduciary standard is meant to apply solely to advisors in the business of and compensated for giving financial advice. The Exchange Act and its suitability standard, on the other hand, is meant to apply to brokers selling a financial product to a customer. Put simply, advisors advise clients and brokers sell a product, so it makes sense each is regulated differently.

What About “Dual-Registered” Advisors?

To further muddy the regulatory waters, advisors can sometimes be “part-time” fiduciaries in practice. These advisors are typically affiliated with both an RIA and a Broker-Dealer, which allows them to put on and take off a fiduciary “hat.” When acting as investment advisors and giving financial advice, dually registered professionals must adhere to the fiduciary standard. However, they have the ability to “take the hat off” when effectuating a transaction or sale, and act as a representative of their Broker-Dealer, thus tying them only to the suitability standard. It is important to know whether an advisor is a full-time fiduciary or can take his or her fiduciary hat off. One of the best ways to do this is to ask your advisor if he/she is a fiduciary and have this put in writing.

Why Should I Work with a Fiduciary?

As referenced earlier, forming a quality relationship with a financial advisor revolves around trust. It is much easier to build that trust when your advisor is acting as a fiduciary at all times. The regulation of financial professionals is designed for this to be the case, even if poorly enforced! A broker can help with a financial transaction in isolation, like a stock or bond trade, but a broker was not meant to give financial advice. That is the job of a financial advisor, whose fiduciary duty reflects this. Fiduciary advisors are typically only paid directly by their client, and do not earn commissions from financial product sales. When choosing a financial professional, you want to have peace of mind knowing your advisor is always putting your interests first.

Fiduciary vs. Suitability Standard Comparison

Advisors Brokers Dual-Registered Advisors
Regulator Securities and Exchange Commission (SEC) Financial Industry Regulatory Authority (FINRA) SEC and FINRA
Compensation Flat percentage fee, flat dollar fee, percentage of assets managed Typically, commission connected to product sold Fee & Commission
Entity RIA Broker-Dealer RIA & Broker-Dealer
Fiduciary Yes, must put the client’s best interests first No, but must make sure recommendations are suitable for customer Sometimes, depending on the transaction
Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2020 Wealthspire Advisors

Kevin Brady, CFP®

Kevin is an advisor in our New York City office.