In the world of financial planning, the term "fiduciary" has become co-opted and rather commoditized. From my perspective, being a fiduciary at its most basic definition means placing your client's interests before your own. But further unpacked, this simple definition can become a viper's den of complications and caveats in certain hands.
Let's discuss the distinctions of a true fiduciary and those who may simply use the term.
The largest distinction lies in the difference between investment advisers, acting as a fiduciary by strict definition, and a broker-dealer, whose actions may not be in a fiduciary capacity at all. My firm's investment adviser, Certified Advisory Corp, is the former and provides investment advice to its clients. The only fee we derive for the advice rendered is the agreed-upon fee.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In contrast, a broker-dealer cannot legally provide substantive advice. The advice they do provide typically comes attached to a product. This product may be the brokerage platform itself and, more insidiously, a proprietary investment product.
Imagine a scenario in which your broker-dealer charges you 0.50% for investment advice on your $10 million of investable plan assets. They also charge you a fee for trades executed through their brokerage platform—clear incentive to ensure your broker-dealer affiliated adviser uses only that platform and does not search for equal, more cost-effective alternatives. At the same time, your broker-dealer-affiliated adviser may also push a branded proprietary product. If selected, the revenue of this product flows back to the broker-dealer parent, and your adviser likely receives a commission or soft dollar incentive for this additionally derived revenue.
This proprietary investment product, now added to your portfolio or investment lineup, may be a fine product, and truly suitable. However, did your adviser act in your best interest and search for alternatives that perhaps had a better share class or other lower fees? In a worst-case scenario, are you certain they properly evaluated investment alternatives that may not only have been cheaper, but may have also outperformed their proprietary offering?
The commission-based incentive to sell you this product ensures that they likely have not taken these actions. If you are a sponsor of an employee retirement plan, this lack of fiduciary due diligence on your end now opens you up to a litany of breach of fiduciary duty claims that settle on your shoulders—not on your broker-dealer, who never truly accepted the role of a fiduciary that ERISA mandates.
The Department of Labor's Fiduciary Rule
These issues should be enough to bring one question to the fore: "How much money is my broker-dealer or broker-dealer's registered representative deriving from their relationship with me?" The answer is likely much more than the fee you believe you're paying.
The next question you should ask your adviser point blank: "Are you a fiduciary? And, if so, "What kind of fiduciary are you?"
Helping to clarify these questions is the Department of Labor's new fiduciary rule, which is scheduled to be instituted in full in the coming months. And while complicated, totaling more than 1,000 pages, it does lay out one very clear thesis: Broker-dealers cannot provide advice nor exist as fiduciaries in any capacity if they are also providing investment product. Given this, it does beg the question of whether broker-dealers can ever act as fiduciaries or, in fact, have ever truly acted in this capacity historically.
Besides asking whether a professional is a fiduciary, you can also check whether the adviser has received the Centre for Fiduciary Excellence's CEFEX designation—as Certified Advisory Corp has.
Only 75 investment advisers in the U.S. are currently CEFEX certified. The process to certification requires a 120-page questionnaire and an on-site examination. The Centre for Fiduciary Excellence is independent, and its CEFEX designation is described as serving investors "who require assurance that their investments are being managed according to commonly accepted best practices." At the same time, it assists these investors in identifying and determining "the trustworthiness of investment fiduciaries."
You can learn more about the specifics of the CEFEX process here, but I believe this designation underscores a commitment to both the spirit and the letter of being a fiduciary.
When working with a CEFEX-certified firm, you can rest assured that you are working with a true fiduciary, who is providing you the latest insight to achieve distinctive results.
Joseph F. Bert, CFP®, AIF®, the founder of Certified Financial Group, Inc., has been in the financial planning profession since 1976. He is also president of Certified Advisory Corp and a member of the Financial Planning Association, where he served as its President and Chairman of the Central Florida chapter.
Since 1976, Certified Financial Group, Inc., has grown to become one of central Florida's largest independent financial services firms providing fee-only financial planning and investment management to individuals, families and employer-related retirement plans through its Investment Adviser, Certified Advisory Corp.
-
Dow, S&P 500 Slip on December Rate Cut Worries, Nvidia Boosts Nasdaq: Stock Market TodayNvidia became the first company ever to boast a $5 trillion market cap, but it wasn't enough to lift the Dow and the S&P 500.
-
Where You Choose to Stash $100k Now Comes with a Big Opportunity CostThe Fed recently cut rates. Here's where to maximize your savings while rates remain higher.
-
I'm a CPA: Control These Three Levers to Keep Your Retirement on TrackThink of investing in terms of time, savings and risk. By carefully monitoring all three, you'll keep your retirement plans heading in the right direction.
-
Debunking Three Myths About Defined Outcome ETFs (aka Buffered ETFs)Defined outcome ETFs offer a middle ground between traditional equity and fixed-income investments, helping provide downside protection and upside participation.
-
This Is Why Judge Judy Says Details Are Important in Contracts: This Contract Had HolesA couple's disastrous experience with reclaimed wood flooring led to safety hazards and a lesson in the critical importance of detailed contracts.
-
A Lesson From the School of Rock (and a Financial Adviser) as the Markets Go Around and AroundIt's hard to hold your nerve during a downturn, but next time the markets take a tumble, remember this quick rock 'n' roll tutorial and aim to stay invested.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
