Fiduciary Vs. Financial Advisor: What’s the Difference?

VioletaStoimenova/Getty Images

Whether you’re searching for the best retirement plan, thinking about future education expenses, or looking at estate planning strategies, seeking out a professional is usually the best way to reach your financial goals. But not all financial and investment experts are guaranteed to put your best interest first.

Fiduciaries and financial advisors have similar levels of expertise and generally offer the same services. But the advisors do not offer the same degree of guaranteed trustworthiness, education, experience, and unbiased advice as fiduciaries.

How a Fiduciary works

By: Tessa Campbell

Source: Fiduciary Vs. Financial Advisor: What’s the Difference?

.

Critics:

Financial advisers typically provide financial products and services, depending on the qualification examinations they hold and the training they have. Financial advisers are registered, not licensed. For example, a licensed insurance agent may be qualified to sell both life insurance and variable annuities, because the insurance agent holds an insurance license and holds the Series 7 qualification examination. A broker (Series 7) may also be a financial planner.

Any advisor can say they are a financial planner; they do not have to hold the CFP (Certified Financial Planner) designation to do so. A financial adviser may create financial plans for clients or sell financial products, or a combination of both. They may also provide insight on savings. A financial adviser is generally compensated through fees, commissions, or a combination of both. For example, a financial adviser may be compensated in one or more of the following ways:

• An hourly fee for advisory services
• A flat fee, such as $3,500 per year, for an annual portfolio review or $5,000 for a financial plan. This is often referred to as “flat fee advisors”
• A commission on the securities bought or sold, such as $12 per trade
• A commission (sometimes called a “load”) based on the amount invested in a mutual fund or variable annuity
• A “mark-up”: when one buys “house” products (such as bonds that the broker holds in inventory), or a “mark-down” when they are sold
• A fee for assets under management (AUM), such as 1% annually of assets managed

Both spellings, advisor and adviser, are accepted and denote someone who provides advice. According to one textbook, adviser and advisor are not interchangeable in the financial services industry, since the term adviser is generally used “when referring to legislative acts and their requirements and advisor when referring to a practitioner. Since [a financial advisor’s practice] is never described as an advisery practice, advisor is preferable when not referencing the law.”

Congress and the Securities Exchange Commission refer to “investment advisers” when discussing regulation of them in the Investment Advisers Act of 1940.

The anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on Investment Advisors to act as fiduciaries in dealings with their clients. This means the adviser must hold the client’s interest above its own in all matters. The SEC has said that an adviser has a duty to:

• Make reasonable investment recommendations independent of outside influences
• Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
• Make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation, and other factors
• Always place client interests ahead of its own.

Since the financial crisis in 2008, there has been great debate regarding the fiduciary standard and to which advisers it should apply. In July 2010, The Dodd–Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures, including enhanced disclosures and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisers regulated by the 1940 Act.

As of July 2016, the SEC has yet to extend the fiduciary duty to all brokers and advisers regardless of their designation. However, in April 2016, the Department of Labor finalized a thousand-page rule holding all brokers, including independent brokers, working with retirement accounts (IRAs, 401(k)s, etc.) to the fiduciary standard.

In June 2016, as a way to address adviser conflicts of interest, the DOL ruled in a redefinition of what constitutes financial advice, and who is considered a fiduciary. Prior to 2016, fiduciary standards only applied to Registered Investment Advisers (RIAs), and did not impact brokers, who previously operated under a less strict “suitability” standard that provided leeway to provide education without “advice”.

The new ruling requires all financial advisers who offer advice for compensation to act as fiduciaries and meet the fiduciary standard, but only when dealing with retirement accounts such as IRA or 401(k) accounts. The ruling includes one exemption for brokers, Best Interest Contract Exemption, which can be allowed if the broker enters into a contract with the plan participant and meets certain behavioral requirements.

The new ruling does not impact the advice or investment product sales pertaining to non-retirement accounts. Opposition to the fiduciary standard maintains that the higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers.

Other criticisms suggest that consumers with smaller retirement accounts may be less able to access personalized advice due to advisor/broker compensation models, many of which have been restructured to comply with the fiduciary rule. The decision has caused a massive shift in the financial community. One survey found that 73% of advisors were concerned the rule would have an adverse impact on how they do business, 71% anticipated increased client frustration, and 66% planned to reevaluate the products they recommend.

Enforcement of the rule began on 9 June 2017 but is no longer enforced since the DOL fiduciary rule was officially vacated on 21 June 2018 by the U.S. Fifth Circuit Court of Appeals. On 5 June 2019, the SEC adopted Regulation Best Interest, establishing a new standard of conduct under the Securities Exchange Act of 1934 (“Exchange Act”) for broker-dealers, with compliance due to begin 30 June 2020. In July 2020, the DOL proposed a new fiduciary rule,and  made two changes to guidance and regulation…

Related contents:

• “Understanding Professional Designations”. FINRA. Archived from the original on 6 October 2012. Retrieved 8 November 2012.
• “Selecting Investment Professionals”. FINRA. Archived from the original on 9 March 2015. Retrieved 8 November 2012.
• Zanella, Nicola (2014). “The Financial Risks Pyramid: Taking a Holistic Approach to Financial Advice”. The Journal of Wealth Management. 17 (3): 27–34. doi:10.3905/jwm.2014.17.3.027. S2CID 155314723. Retrieved 1 October 2022.
• “What Do Financial Advisors Do?”.
• “Investor Bulletin: Top Tips for Selecting a Financial Professional” (PDF). SEC: Office of Investor Education and Advocacy. Retrieved 8 November 2012.
• Taylor, Don (2005). C. Bruce Worsham (ed.). Financial Planning: Process and Environment. Bryn Mawr, PA: The American College Press. p. 9.3. ISBN 1-932819-08-8.
• “InvestmentAdvisersAct”.
• Cussen, Mark P. “Broker-Dealers vs RIAs: What’s the Difference?”. Investopedia. Retrieved 18 March 2020.
• “The Rise of the Hybrid RIA – A Financial Services Odyssey”. AdvisorHub. Retrieved 18 March 2020.
• 
• “IBD Elite 2019: Time to celebrate? Not just yet”. Financial Planning. 3 June 2019. Retrieved 18 March 2020.
• “FP50: IBDs with the largest total revenues”. Financial Planning. 1 June 2017. Retrieved 18 March 2020.
• Wohlner, Roger. “The Fiduciary Rule and Its Impact on Mutual Funds”. Investopedia. Retrieved 15 April 2020.
• July 17, Janet Levaux |; PM, 2019 at 03:22. “Merrill Says RIA Option Is a No-Go”. ThinkAdvisor. Retrieved 18 March 2020.
• “Edelman Financial Engines is bringing financial planners to small 401(k) plans”. InvestmentNews. 20 September 2019. Retrieved 18 March 2020.