Is Your Financial Advisor a Fiduciary? How to Find Out and What to Do If They Aren’t

Whenever the topic of talking with a financial professional who can help create a long-term strategy toward retirement arises, we label this individual a financial advisor. Choosing this individual is a big decision in your life as you look to this person for guidance, planning, and safeguarding your financial future. 

However, for many reasons, the suggestion should be to talk with a fiduciary financial advisor, as we want to take it one step further and work with someone also serving under a fiduciary duty. But how do you know the difference, and why is this distinction so important? 

What Is A Fiduciary? 

When you look deeper into what a fiduciary means, it’s a person legally obligated to act in the best interest of another party or client. This is typically someone who manages money and/or property for someone else. As a fiduciary, you must legally manage any person’s money or property for their benefit, not your financial gain.

Should a conflict of interest arise, the fiduciary’s duty is to inform the client and guide them forward. Several types of fiduciary roles exist, including the financial advisor, but an attorney, trustee, conservator, or guardian would also fit this definition. 

What Is a Financial Advisor? 

A financial advisor or professional provides services to clients to help them manage their money. This is viewed as someone who has a broad title serving as a financial professional, which includes the specific role of a financial advisor but also includes that of an insurance broker or an investment advisor. 

Assuming they follow the letter of the law, financial professionals should act in their clients’ best interest. They are often labeled as Certified Financial Planners or CFPs. This person generally has a license from FINRA, the Financial Industry Regulatory Authority, which means they can legitimately serve in this capacity.  

It’s crucial to note the distinction here as not all financial professionals are fiduciaries, which means they are not legally required to put their clients’ interests above their own. This means they can recommend a mutual fund with a higher fee or generate more long-term commissions, so long as this option is still suitable for their client. 

How to Verify A Fiduciary Status

The easiest thing for any individual to do is ask if someone is a fiduciary when you first meet them: “Are you a fiduciary?” If someone is a true fiduciary, they shouldn’t hesitate to answer in the affirmative or decline any request for this to be written, likely in the form of a client agreement.

However, if you are still unsure, you can verify credentials at different credential sites, such as the FINRA BrokerCheck website or the SEC’s Investment Advisor Public Disclosure site. There are also resources available at the CFP Board or the National Association of Personal Financial Advisors that can help you locate someone with the proper certifications. 

Any registered investment advisor will be registered with the Securities and Exchange Commission or a similar state bureau, so finding their licensing and verifying their status as a registered fiduciary shouldn’t be a heavy lift. To be clear, if someone hesitates about whether or not they are a registered and licensed fiduciary, you should end the conversation immediately and or hang up the phone. 

Implications of Non-Fiduciary Advice

Hidden Costs and Fees

Right from the start, one of the biggest implications of using non-fiduciary advice could be that a relationship with someone in this space isn’t guided by a fiduciary’s more stringent disclosure agreement. This means you could be subjected to fees beyond the traditional 1% or even 2% wealth management fee. 

Not only can additional fees erode your wealth, but they would also create an immediate level of distrust between you and this non-fiduciary advisor. Many studies show that non-fiduciary advisors tend to lean more toward higher-cost or higher-fee mutual funds, unlike a fiduciary that might suggest lower-cost index funds, ETFS, or fee-transparent solutions. 

Suppose you are working with a commission-based financial advisor. In that case, they might still give you good advice but face a conflict of interest when asking to incentivize you to invest in particular investment products or vehicles. 

A sub-example of this is how incentives drive any non-fiduciary’s recommendation. There is little question that this would be appropriately disclosed, especially around how a non-fiduciary will be compensated for investing in a new portion of your portfolio. 

Legal Implications 

Unlike with a fiduciary, if you believe you have been wronged by a non-fiduciary, there is a challenging road to legal course. It’s very difficult to prove that the advice you received resulted in lost money and or constitutes misconduct. Rest assured that misconduct is very hard to prove, and while there is FINRA arbitration, the fraud or misconduct would have to be incredibly blatant to result in your favor if the results of a 2021 Stanford Law study are to be believed. 

What Steps Are Available If You Have Concerns

In the event you have concerns that your financial advisor isn’t acting as a fiduciary and putting your interests above their own, there are some steps you can quickly take. Experts would tell you that these steps will help you make the case that someone isn’t acting in your best interest if you want to pursue legal action or arbitration. 

Document Everything

Experts recommend documenting everything, including every email, note, meeting time, contract, or other conversation or interaction with your fiduciary financial advisor. 

Document and notate what high-cost products they offered you without proper explanation or that completely ignored your risk-averse goals of slowly building up your wealth. The CFP Board mentioned earlier recommends that you log dates, times, and specific promises such as comments like “This fund will outperform your other investments” to identify any pattern construed as this individual acting in their own self-interest. 

It’s also essential to continuously review your account statements for any unusual transactions or transactions that don’t match the plan you agreed to with your advisor. 

Confront In Writing

Another expert-recommended step is to confront your advisor, but ensure you only do so in writing. You can say, “I noticed this investment opportunity has a 5% commission. Why wasn’t a lower-cost option offered to me?” The goal is to keep this professional and not be accusatory in the email, but you don’t want to play dumb, as this is something you quickly caught and wanted to address. 

At this point, you should once again (or maybe for the first time) ask about their fiduciary status and request, in writing again, how this investment best meets their interests and financial goals. The National Association of Personal Financial Advisors recommends this step if a simple misunderstanding can be easily explained or if you want to verify that someone has bad faith intentions with your money. 

Filing Complaints

As noted above, arbitration can be very hard to prove, never mind win, but if you reach the point that your concerns are justified enough and you believe you have what you need in writing, contract FINRA and the SEC for the next steps. Both groups have online portals where you can include your documented work of bad faith and any specific losses you incurred during this time. 

The SEC recommends that you take action within two years of being notified of any bad faith acts performed by your non-fiduciary financial advisor. If you wait longer than this two-year period, the likelihood of success around your claim drops dramatically, which means you could be out money for good. 

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