Is Your Financial Planner Acting in Your Best Interest?

A financial planner meets a client in a restaurant. — (Image credit: Getty Images)

The COVID-19 pandemic created financial challenges for people across the world and led to increased demand for professional financial advice. During the height of the pandemic last April, nearly 8 in 10 CFP® professionals (78%) reported an uptick in inquiries from clients, and 1 in 3 (34%) saw an increase in inquiries from prospective clients.

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As more Americans turn to financial planners to better understand their finances and develop holistic financial plans, it is more important than ever that people understand the importance of working with someone you can trust, someone who will put your interests first — in other words, a fiduciary.

But what does it mean to be a fiduciary, and how can you tell if your financial adviser is one?

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What Is a Fiduciary?

At a high level, the term “fiduciary” means to always put the client’s interest first. When working with a financial adviser, many people assume that’s always the case. However, that’s not always true.

The Securities and Exchange Commission (SEC) applies a fiduciary duty to Registered Investment Adviser representatives (RIAs). In addition to the fiduciary standard, two other common standards are the suitability standard and the “best interest” standard that the SEC introduced for broker-dealers in the 2019 Regulation Best Interest (Reg BI).

The suitability standard requires advisers to provide advice that is “suitable,” benefiting you but not necessarily in your best interest. For broker-dealers, the suitability standard largely was superseded by Reg BI’s “best interest” standard. But even so, the SEC has said that Reg BI is not a fiduciary standard.

These lower standards do not require advisers to place your interests ahead of their interests at all times when providing financial advice. While it is a step in the right direction, Reg BI does not do enough for investors as it draws upon the key principles of a fiduciary standard and best interest principles but does not hold advisers to a true fiduciary standard.

The CFP® Certification Difference

As part of their certification, CFP® professionals make a commitment to CFP Board to act as a fiduciary when providing financial advice. You should want a financial adviser who makes this commitment directly to you. Therefore, whomever you choose as your financial professional, including a CFP® professional, you should consider getting a written engagement that requires them to have a fiduciary obligation to you. It is a common request, and something you can feel comfortable asking for in your initial correspondence before your introductory meeting.

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It is important to note that just because a financial planner is a fiduciary doesn’t mean the adviser is free of conflicts of interest. Under the Code of Ethics and Standards of Conduct, CFP® professionals make a commitment to CFP Board to address conflicts of interest that could affect the professional relationship. This means fully disclosing the conflict, obtaining the client’s informed consent, and managing the conflict in the client’s best interests. For example, when providing advice on life insurance, if your adviser receives a commission from the product being offered, the adviser need to disclose that information to you. If a particular insurance product is not in your best interests, then they need to recommend a different product.

Working with a Dually Registered Professional

A dually registered adviser is affiliated with both an RIA and a broker-dealer. Whether the SEC’s fiduciary standard applies depends on whether the professional is acting in an investment advisory capacity. The lower Reg BI standard applies when they are selling investment products as a registered representative of a broker-dealer. When working with a dually registered professional, you can ask them whether they are acting as an investment adviser representative or a representative of a broker-dealer.

There are benefits to working with a dually registered professional as they can develop and implement holistic financial plans. When working with a dually registered representative, be aware of their dual roles and know when the adviser is subject to the SEC’s fiduciary duty rather than Reg BI standard.

Finally, Do a Background Check

It is also important that you do your due diligence and see if your adviser has been disciplined publicly. The Financial Industry Regulatory Authority (FINRA) BrokerCheck Website, SEC Investment Adviser Public Disclosure Database and the Verify a CFP® Professional tool on CFP Board’s website are available to everyone.

Whether you already have an established relationship with a financial planner or are currently searching for one, it is up to you to you to get a written engagement that requires them to have a fiduciary obligation to you.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Kevin R. Keller, CAE, is CEO of the Certified Financial Planner Board of Standards Inc. CFP Board sets standards for financial planning and administers the prestigious CFP® certification – one of the most respected certifications in financial services and one of the few accredited financial services designations. He leads CFP Board to benefit the public by granting CFP® certification and upholding it as the standard of excellence for competent and ethical personal financial planning.