Is Your Financial Adviser Really Working for You?

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Several weeks ago, during a regular face-to-face chat about my Roth IRA investment choices, I asked my financial adviser if he’d be willing to sign a fiduciary pledge.

I’d read a bit of the buzz about fiduciary pledges and the fiduciary duty behind them and knew just enough to be curious about my own adviser’s willingness to sign. I even prepared for this part of our conversation by printing out a fairly standard fiduciary pledge and having it ready for him to review, consider, and (perhaps) sign.

Here’s what it looks like:

Fiduciary Pledge

I, the undersigned, ___________________________ (“financial advisor”), pledge to
always put the best interests of ________________________________ (“client”) first, no
matter what.
As such, I will disclose in writing the following material facts and any conflicts of
interest (actual and/or perceived) that may arise in our business relationship:
 All commission, fees, loads, and expenses, in advance, client will pay as a
result of my advice and recommendations;
 All commission and commissions I receive as a result of my advice and
 The maximum fee discount allowed by my firm and the largest fee discount
I give to other customers;
 The fee discount client is receiving;
 Any recruitment bonuses and other recruitment compensation I have or
will receive from my firm;
 Fees I paid to others for the referral of client to me;
 Fees I have or will receive for referring client to any third-parties; and
 Any other financial conflicts of interest that could reasonably compromise
the impartiality of my advice and recommendations.

Advisor: _____________________________________ Date: _____________________

So how did my adviser react upon reading this pledge? His reaction was, in a word, disappointing.

He stammered through his response, claiming he’d never heard of a fiduciary pledge and had never been asked to sign one before. I was getting ready to do some serious backtracking and apologize for my affront when he agreed to take a copy of the pledge for his superiors to review. A few days later, he called to inform me that he would be unable to sign.

The whole awkward and unsettling experience got me thinking: How many other people have been in the same boat? How important are fiduciary pledges and what are the implications if your longtime financial adviser declines to sign one?

What’s a fiduciary?

If you’re new to the topic of fiduciary pledges, a definition is in order: A fiduciary pledge is essentially a promise made in writing by brokers, financial advisers or other types of money managers to follow a fiduciary standard of conduct — that is, to always act in good faith and in the best interest of their clients and to put clients’ financial well-being ahead of their own. Fiduciary pledges outline any potential conflicts of interest, relevant financial facts, and commissions, fees or bonuses that an adviser may receive as a result of his advice.

This sounds so straightforward and sensible that you may ask yourself, “Well, aren’t financial advisers and brokers required by law to do this anyway?” The short answer, unfortunately, is no. As surreal as it may sound, some folks who are dispensing financial advice these days are simply salespeople with impressive-sounding titles and they may be skewing their investment suggestions to favor those products that pay richer commissions.

Fiduciary vs. suitability

You might be wondering: If the person I’m trusting for financial advice won’t agree to act as a fiduciary, exactly what is that person’s responsibility? The answer is, most commission-based financial advisers are held to a lesser standard, known as suitability.

While a fiduciary agrees to put your interests ahead of his own, suitability means he is only required to suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.

An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a good investment for you would be a stock mutual fund. There are two similar funds available. One charges a 5 percent commission and the other 2 percent. A fiduciary would be honor bound to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays him the higher commission, because either fund is suitable.

In a brief conversation I had with former investment adviser and Money Talks News founder Stacy Johnson about this topic, he didn’t mince words:

Thanks to lobbying by the financial services industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 without this important consumer protection. Now it’s up to consumers to force the industry to act in our best interests by shunning any adviser or company that refuses to act according to the fiduciary standard of conduct.

The burden is on consumers

As Stacy points out, the burden lies with consumers to determine if the financial professional they’re working with is giving advice based on sound investment strategy or murkier motivations like commissions and behind-the-scenes bonus structures that favor one investment product over another. To be clear, signing a fiduciary pledge in no way suggests that your financial adviser can’t make a profit. It simply assures that his profit won’t come at your expense — an important distinction.

So, what do you do if you find yourself in the uncomfortable position of having a trusted financial adviser decline to sign a fiduciary pledge? Is it worth ending the relationship and seeking counsel from a more willing and candid money manager? Stacy thinks so:

I’m sure there are honest, dedicated advisers whose companies simply won’t allow them to sign a fiduciary pledge. But I’d only work with such an adviser until I found a different one whose firm didn’t mind explicitly guaranteeing that they put customers’ interests ahead of their own. And pledge or no pledge, consumers shouldn’t work with any financial professional who’s compensated through commissions. It sets the stage for blatant conflicts of interest.

As the new year approaches, I’ve made a little note in my daily planner that reads, “research new investment professional” and I intend to do just that. To be fair, I don’t think my current adviser has led me astray, but then again, I’m operating with only limited information, and that appears to be by design. That’s the downside to money managers who choose not to make a fiduciary promise — their integrity is called into question whether it’s deserved or not.

One thing I’m sure of: As my investment goals change and my financial picture gets more complex with age, I’ll need an adviser who’s not only knowledgeable, but utterly transparent and guided by the quite reasonable expectation that my financial well-being supersedes his own interests.

With this issue, consumers must begin to demand that all investment professionals who dispense advice be held to a fiduciary standard of conduct. Those who are unwilling or unable should, understandably, be called out.

Have you asked your financial adviser to sign a fiduciary pledge? What kind of response did you get? Share your comments below or on our Facebook page.

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