Is Your Financial Planner Acting In Your Best Interest?
The COVID-19 pandemic has created financial challenges for people across the world and has led to increased demand for professional financial advice. At the height of the pandemic last April, nearly 8 in 10 CFPÂ® professionals (78%) reported an increase in client inquiries, and 1 in 3 (34%) saw an increase in inquiries from clients. potential customers.
As more Americans turn to financial planners to better understand their finances and develop holistic financial plans, it’s more important than ever that people understand the importance of working with someone you can trust. have confidence, someone who will put your interests first, in other words, a trustee.
But what does it mean to be a fiduciary, and how do you know if your financial advisor is?
What is a fiduciary?
At a high level, the term âfiduciaryâ means to always put the best interests of the client first. When working with a financial advisor, many people assume this is always the case. However, this is not always true.
The Securities and Exchange Commission (SEC) enforces a fiduciary duty on representatives of registered investment advisers (RIAs). In addition to the fiduciary standard, two other common standards are the adequacy standard and the âbest interestâ standard that the SEC introduced for brokers in the 2019 Best Interest Regulation (Reg BI).
The adequacy standard requires advisors to provide âappropriateâ advice, which is beneficial to you but not necessarily in your best interest. For brokers, the suitability standard has largely been replaced by Reg BI’s âbest interestâ standard. But even so, the SEC said Reg BI is not a fiduciary standard.
These less stringent standards do not require advisors to put your interests ahead of their interests at all times when providing financial advice. While this is a step in the right direction, Reg BI is not doing enough for investors as it is grounded in the key principles of a fiduciary standard and best interest principles, but does not force advisers to a true fiduciary standard.
The CFPÂ® certification difference
As part of their certification, CFPÂ® professionals commit to the CFP Board of Directors to act as a trustee when providing financial advice. You should need a financial advisor who is committed to you directly. Therefore, whoever you choose as a financial professional, including a CFPÂ® professional, you should consider obtaining a written undertaking that requires them to have a fiduciary duty to you. This is a common request, and you may feel comfortable asking in your initial correspondence before your introductory meeting.
It is important to note that just because a financial planner is a trustee does not mean the advisor is free from conflicts of interest. Under the Code of ethics and standards of conduct, CFPÂ® professionals make a commitment to the CFP Board of Directors to deal with conflicts of interest that could affect the professional relationship. This means fully disclosing the conflict, obtaining informed consent from the client, and managing the conflict in the best interest of the client. For example, when providing advice on life insurance, if your advisor receives a commission on the product being offered, they should disclose that information to you. If a particular insurance product is not in your best interest, then they should recommend a different product.
Work with a dual-registration professional
A dual-registration advisor is affiliated with both a RIA and a broker. The application of the SEC fiduciary standard depends on whether the professional is acting as an investment advisor. The lower Reg BI standard applies when they sell investment products as a registered representative of a broker. When working with a dual-registered professional, you can ask them if they are acting as a representative of an investment adviser or as a representative of a dealer.
There are benefits to working with a Double Registered Professional as they can develop and implement holistic financial plans. When working with a doubly registered representative, be aware of their dual role and know when the advisor is subject to the fiduciary duty of the SEC rather than the Reg BI standard.
Finally, do a background check
It is also important that you do your due diligence and see if your advisor has been publicly sanctioned. The Financial Sector Regulatory Authority’s (FINRA) BrokerCheck website, the SEC Investment Advisor Public Disclosure Database, and the Verify a CFPÂ® Professional tool on the CFP Board website are available at all.
Whether you already have an established relationship with a financial planner or are currently seeking one, it is up to you to obtain a written commitment that requires them to have a fiduciary duty to you.
President and CEO, Certified Financial Planner Board of Standards, Inc. (CFP Board)
Kevin R. Keller, CAE, is CEO of the Certified Financial Planner Board of Standards Inc. The CFP Board sets standards for financial planning and administers the prestigious CFPÂ® certification – one of the most respected certifications in the financial services industry and one of the few service designations. He leads the CFP Board of Directors for the benefit of the public by granting CFPÂ® certification and maintaining it as the gold standard for competent and ethical personal financial planning.