Does Your Advisor Really Have Your Best Interests at Heart?

Since the late 1990s, the Internet has enabled broad access to investment information. This, coupled with the rise of discount brokers, has provided cost-effective ways for anyone with a computer to play in the stock market. Companies like Schwab and eTrade have reduced trading fees to zero, and “Robo advisors” like PersonalCapital.com have automated the process of providing asset allocation guidance and rebalancing, making it easier than ever to self-invest.  Gone are the days where an advisor is paid for placing a trade or selling an investment product. In the wake of this explosion of self-investment tools, the role of the human financial advisor has been forced to shift over time. Today most investors are looking for an advisor who does more than just place trades or offer basic investment information. Financial advisors, commission-based brokers and even wire house advisers are pivoting to provide wealth enhancement guidance across a client’s entire financial life; well beyond just those assets that are in the accounts that they directly manage.

These shifts in client service scope and focus have raised questions within the financial services industry. Do these newly minted advisors have the financial expertise to provide advice for a more comprehensive, holistic set of financial questions?  With the market flooding with these new ‘innovators’ what stop gap measures are in place ensuring these advisors keep clients’ best interest front and center when making portfolio decisions?

Not everyone is bound by the same laws, and conflicts of interest exist through the financial world and can at times be difficult to identify and navigate.

Even in a “fee-only” environment, an advisor is still faced with situations where their advice may directly impact their compensation.  When is an advisor is “legally required” to put clients’ interests first rather than enhancing their own compensation?  Understanding an advisor’s role, responsibilities and compensation structure is key to knowing whether he or she puts clients’ interests first.  Let’s explore what that means to investors.

What does it mean to be 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. 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.

The financial advisor who is a fiduciary owes the client a duty of loyalty, which means they must always act in the best interest of the client. If a conflict of interest exists, the advisor must make full and fair disclosure of all material facts so the client can make an informed decision whether to proceed with a transaction.  A fiduciary financial advisor must, by law:

  • Make sure all investment advice is accurate and complete, to the best of their knowledge.
  • Avoid and disclose all potential conflicts of interest.
  • Clearly disclose all fees and commissions.
  • Make investment recommendations that are consistent with the goals, objectives, and risk tolerance of their clients.

At the end of the day, it’s the law-bound fiduciary requirement that has the ability to provide investors with the peace of mind that their interests will be put first.

Why Should I Work with a Fiduciary?

Not all financial advisors are fiduciaries. All investment advisors registered with the SEC or a State securities regulator (Registered Investment Advisors or RIA) must act as fiduciaries. Broker-dealers, stockbrokers and insurance agents are only required to fulfill a “suitability obligation”. This means that while the advice they give you may be suitable to your situation, but there’s wiggle room. That wiggle room could open up the possibility of recommending higher priced products that yield more commissions for the broker over similar, lower-cost options.

Coldstream and its advisors are fiduciaries, meaning we are obligated to put your interests first, ahead of our own, when providing transparent and objective advice in managing your assets. Our role as fiduciary sets us apart from other investment brokers and money managers. We must – at all times – serve your best interests. Visit Coldstream.com to talk with an advisor today.

This article was authored by Coldstream’s Wealth Strategy Group including major contributions from Kim Rosenberg, CFP®.