I took a little time away from the office to enjoy a cup of coffee at a local coffee shop.  Because it was a weekday morning, there were quite a few business people meeting there too.  As I sat down to enjoy my newspaper, I couldn’t help but overhear a conversation next to me between a “financial advisor” and a prospective client.  My first instinct was to wonder why they would choose to meet at such a public venue to discuss private personal finance matters…but well…different strokes I suppose!

While I tried to stay focused on my newspaper, I found my ears perking up when the “financial advisor” described his profession.  He said he worked as a fee-based professional for a large firm. He also told the client that he is a “fiduciary.  As a fiduciary, he is legally obligated to put the client’s interests ahead of his own and ahead of his firm.

I nearly knocked over my coffee cup when I heard this “financial advisor” describing himself as a fiduciary.  What??  You see, because I know the firm this advisor works for, I know the firm operates as a dual registrant.  (This means the firm is registered as both an investment adviser AND a broker dealer.   Dual registrants are allowed to collect both a fee for financial advice AND commissions for selling products.)  He went on to describe to the client that while he is not a fee-only advisor, he operates in a way that is better.  He explained that he collects a fee from his clients and operates as a fiduciary when giving some planning advice for this fee.  But unlike a fee-only advisor, he is capable of “completing the financial plan and helping clients by putting needed products in place for them.”  Of course, when selling products, he is no longer working as a fiduciary, but he never directly told the client that part!

“How can someone be a sometimes-fiduciary?”  I wondered.

I admit it was hard for me not to stop the conversation right there and call a foul…but I really wanted to hear the rest of his pitch. As the conversation progressed, it became clear to me that my instincts were correct.  This “financial advisor” was really a salesperson portraying himself as a fiduciary financial advisor.   He went on to say that he could sell this client life insurance, annuities or any other product he felt was appropriate.  He asked the prospective client about life insurance, and whether this client was a “term life person” or a “permanent life insurance person.”  Which did he prefer?  The client gave good reasons for preferring inexpensive term life insurance.  I knew the pitch was coming…and indeed it did.  The “financial advisor” said that he needed to enlighten this client on the newer universal life policies being offered through his firm and proceeded to tout the benefits of his commission-based product.

Do you think this client was confused about who he was talking to?  How could this person claim to be an objective and independent fiduciary advisor, and then start selling high-commission insurance products under a different standard in the next breath?

I admit I found this entire exchange to be upsetting.  While tempted, I did not interject or interfere.  I know my industry is rife with problems and I can’t solve them in one coffee shop with one broker.  There is currently a movement by brokers and brokerage firms to market their salespeople as independent.  Working under a dual registration, these brokers give advice under a fee-based program and also claim to be fiduciaries!

It is increasingly hard to tell if someone is working as a broker or investment adviser because currently MOST (60% of “financial advisors”) are now registered as both!1   This dual registrant will work as a fiduciary when building a financial plan,  but then switch hats and work under the lesser brokerage firm standard of advice called Best Interest when selling financial products.  Is the advisor required to affirmatively tell the client when they have switched hats and are working under the lower regulatory standard?  The answer is clearly “no” and as this adviser proved to me in the coffee shop, they most commonly will not.  Why would someone do business this way?    By being dually registered and offering both fee-based programs and product sales, they are able to keep the combined revenue from both sources, while pretending to work in the best interests of their clients.

I decided to investigate the website of one of these dual registrants, marketing themselves as “independent fiduciaries.”    The required regulatory disclosure of this firm shows that the firm’s representatives are able to charge fees while also guiding clients to commission-earning products.  I copied some of the language from this firm’s disclosure document below.  Do you think this language sounds like a firm you would trust to give you objective advice?

Clients can engage certain persons associated with X RIA Firm to render securities brokerage services under a separate commission-based arrangement. Under this arrangement, the RIA Firm’s Supervised Persons, in their individual capacities as registered representatives of X Brokerage firm may provide securities brokerage services and implement securities transactions under a separate commission-based arrangement. Supervised Persons may be entitled to a portion of the brokerage commissions paid to X Brokerage Firm as well as a share of any ongoing distribution or service (trail) fees from the sale of mutual funds.”

Indeed, it has always been a confusing landscape out there to say the least, and the domination of dual registrants is only making the situation worse.  It is getting harder and harder for consumers to know whether the advice they are getting is in their best interest or is in the best interest of the adviser.  How can you protect yourself and those you care about?  The only way to be confident you are working with a true fiduciary is to choose an advisory firm that is registered as fee-only with the National Association of Personal Financial Advisors (www.NAPFA.org).    Also, be informed.  Understand the fiduciary standard and why it is important.  If you need a refresher you can click on the link below:

https://www.moderawealth.com/fiduciary-what-does-it-mean/

The need for independent advice has never been more important, but it is unfortunately becoming harder to find and discern in the current landscape.  Despite what the broker in the coffee shop said, the fiduciary standard is all or nothing.  A sometimes-fiduciary is not a fiduciary at all.

Is your advisor a fiduciary?

 

Modera Wealth Management, LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New York, New Jersey, Pennsylvania, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. SEC registration does not imply any level of skill or training. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.

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1 Wall Street Journal, June 15, 2019, “Confused About Financial Advisors?  You’re Not Alone”