Today I’m tackling part four (4) of our series on financial advisors.
Specifically, I’m covering three BIG things:
- What is a fiduciary financial advisor (and should investors work with one)
- How are ‘fee-only’ advisors different from ‘fee-based’
- Where can retirement savers search for a financial advisor based on their needs
If you want to understand some of the most misunderstood financial terms + learn how to find a qualified advisor, today’s episode is for you.
Need Tax and Retirement Planning Help?
We specialize in helping people aged 50+ lower taxes, invest smarter, and (safely) create a retirement paycheck.
Our Free Retirement Assessment™ will help you evaluate our firm and others you might be considering.
Click the banner below to learn more. 👇
How to Listen to Today’s Episode
- Subscribe to the Stay Wealthy Newsletter! 📬
- Financial Advisor Series [Stay Wealthy]:
- Resources to Search for Financial Advisors:
- What is a Fiduciary [Tony Robbins]
- The Suitability Standard [FINRA]
- Letter Your Broker Won’t Sign [Stay Wealthy]
- How to Find an Advisers Form ADV [SEC]
Financial Advisors (Part 4): Should You Work With a Fiduciary + How to Find an Advisor
Taylor Schulte: Welcome to the Stay Wealthy podcast, I’m your host Taylor Schulte, and today I’m tackling part four of the series on financial advisors.
Specifically, I’m covering three BIG things:
1. What is a fiduciary financial advisor (and how important is it to work with one)?
2. How are fee-only advisors different from fee-based.
3. Where can retirement savers search for a financial advisor based on their desired criteria?
If you want to finally understand some of the most misunderstood terms used in the world of financial advice, today’s episode is for you.
For all the links and resources mentioned today, head over to youstaywealthy.com/177.
Chances are, you’ve seen or heard the F-word used in conversations about financial advisors.
The F-word being Fiduciary.
In the legal and medical world, the term fiduciary is pretty straightforward. In fact, all doctors and lawyers, per their regulatory guidelines, have a fiduciary obligation to their customers. In other words, they are legally required to act in their clients’ (or patients') best interest at all times.
While some financial advisors adhere to the fiduciary standard, unlike doctors and attorneys, they are not required to, and the vast majority don’t. Not operating under the fiduciary standard doesn’t necessarily mean these advisors don’t act in their client's best interests, but their businesses and compensation arrangements aren’t structured in a way that meets the requirements to hold themselves out as fiduciaries.
The F-word has grown in popularity over the year and has caused a lot of confusion for retirement savers and investors working with a financial advisor or searching for one. My goal today is to clear up that confusion.
To start, let’s define what the term means as it relates to financial advisors and then we will break down a number of common misconceptions.
One of the best descriptions I’ve heard of this overused and often misunderstood term as it relates to financial advisors comes from Tony Robbins on the BUILD series:
Tony Robbins: 10% of those 310,000, 31,000 people in the whole country are considered fiduciaries, that’s the F-word. So let me clarify what it means is these people are, under the law, required to put your needs ahead of their own.
If you go to Australia, the UK, most countries in the world, not only are doctors and lawyers fiduciaries, just like our country, that lawyer has to put you first, that doctor has to put your needs ahead of their own. They can’t order tests just to add up fees for themselves, if they do there’s severe consequences.
We’re the only country like that, in America, because of the financial lobby, they’re not fiduciaries, you have to decide to be a fiduciary and if you do, they’re called RIAs, Registered Investment Advisors or fiduciaries. So if they tell you to buy Apple this morning and they buy apple tonight and they get a better price, they have to give you their stock, that’s how strong the law is. That is not true for any broker.
But then I found something else out. And that is, out of the 31,000 people that have to put you first, 26,000 of them are dually registered which means they’re a broker and a fiduciary.
So if you say “Are you a fiduciary?” they’ll say “Yeah I’m just here, I’m going to just guide you, I’m not going to sell you anything I benefit from.” But in the middle of the conversation they put on a new hat and they sell you a product that they get a big commission on, after they said they were just here to give you advice.
It’s like if you went to a butcher and said “What should I eat?” you know he’s going to sell you meat, that’s what he sells. If you go to a dietician, and the butcher’s a good guy he probably eats the same meat, he’s probably fat and troubled too right. But if you go to a dietician, you’re not paying them to sell you anything, you’re paying them to be independent registered investment advisors, an independent advisor.
So what they’re going to do is they’re going to “Wait a second, too much of that mean and you’re going to get cancer. We need some salad, we need some veggies, we need a little fish here.” And they’re not being incentivised to sell you anything, right, they just get a fee for what they do. That’s the person you want. There’s only 5,000 in the entire United States out of 310,000, 1.6%. That’s why most people get screwed.
Taylor Schulte: To further help clarify any confusion, let me summarize the three most important points Tony made.
First, a fiduciary financial advisor is legally required to put their client's interests ahead of their own.
Second, by definition, a financial advisor cannot be a fiduciary if they earn any amount of their compensation through commissions (the first transactional structure we discussed in last week's episode).
Lastly, some financial advisors operate in a way that allows them to put their fiduciary hat on and take it off as they see fit, sometimes without the client knowing it. To some advisors, this unique business structure has given them permission to tell clients they are a fiduciary, even if there are situations where they are not adhering to this strict standard.
Before we go any further, there are two small corrections I want to make to Tony’s comments. The first is that just because a firm is structured as a Registered Investment Advisor or RIA, doesn’t mean you can automatically assume they are a fiduciary 100% of the time. Some RIAs can take their fiduciary hat on and off as I just mentioned, we refer to these as hybrid firms.
I think what Tony might have been trying to point out is that NONE of the large publicly traded brokerage firms we all know by name meet the requirements that allow them to hold themselves out as a fiduciary 100% of the time. That if working with an advisor who is a fiduciary 100% of the time is important to you, you’ll need to narrow your search down to independent Registered Investment Advisors (or RIAs) and, from there, find one who is not a hybrid firm and adheres to the fiduciary standard 100% of the time. And that is an accurate statement.
In fact, if you think about it, a publicly traded wealth management firm has a fiduciary responsibility first to their shareholders. Their priority is to grow the bottom line of the business, and while I’m sure they are also motivated to do good work for their clients, this structure can create unwanted conflicts of interest for some retirement savers.
The second correction I want to make is to the number of true fiduciary financial advisors in this country. Tony mentioned that there were only about 5,000 of them in the U.S. And while the number is, in fact, strikingly low, my research and conversations with industry experts suggest that there are closer to 15,000 or 20,000 financial advisors that adhere to the fiduciary standard 100% of the time. Again, as a percentage of the 300,000 licensed advisors in this country, it is definitely low, but perhaps not quite as low as Tony had suggested.
As I’ve alluded to, most financial advisors (and advisory firms) have found a way to answer “yes” when being asked by a client if they are a fiduciary. The most common being that there are specific situations where they do, in fact, put on their fiduciary hat, and this ability to swap hats when needed suggests to them that they can tell clients they are a fiduciary. So, unfortunately, it’s just not as simple as asking a financial advisor if they are a fiduciary because most can find a way to answer “yes” and continue on with their day.
A better version of that question might be, “Are you a fiduciary 100% of the time?,” which attempts to uncover if the advisor is able to take their fiduciary hat on and off. But even then, you may not be able to get a completely transparent answer and advisors might have a clever way of answering this question to satisfy the client or potential client.
Given all of this, if working with someone who is a fiduciary 100% of the time is important to you, and you want to know you’re getting an accurate answer, there are two solutions for you to consider.
First, there is a publicly available legal document that every financial advisory firm is required to update, file, and send to clients at least once per year. This document is known as Form ADV. You can find an advisors Form ADV on the SEC website which I’ll link to in the show notes or you can simply ask the financial advisor you’re working with (or considering hiring) for a copy of the document.
With a copy of Form ADV, you can look to Section 5-E which documents the advisor's compensation structure. If the compensation structure titled “Commissions” is checked, the advisor and their firm cannot hold themselves out as being a fiduciary 100% of the time. They might be good, honest people, and adhere to the fiduciary standard in some situations, but they are not legally obligated to in every situation.
Instead of digging through public documents, another solution is to simply ask the advisor to sign a “Fiduciary Letter of Commitment.” You can write one up yourself or use mine as a starting point. As noted in last week's episode, I call it the “Letter Your Broker Won’t Sign” and I’ll link to it again in the show notes again if you’re interested.
And while it’s possible a fiduciary financial advisor might suggest a few small edits to the letter to satisfy their legal team, if someone truly is a fiduciary 100% of the time, they shouldn’t have an issue signing something confirming their legal obligation to put your interests first at all times.
So, to recap, there are financial advisors who very clearly do not meet the requirements to hold themselves out as a fiduciary. There are advisors, often referred to as hybrid firms, who can be a fiduciary in some situations, but not in every situation. And there are a small percentage of advisors, maybe 15,000 - 20,000, who very clearly meet the legal requirements and adhere to the fiduciary standard 100% of the time.
With all of this in mind, how important is it that someone work with an advisor who adheres to the fiduciary standard 100% of the time? Is there a case to be made to work with someone who isn’t a fiduciary or who only adheres to the fiduciary standard in certain situations?
So, to tackle the first part of the question, yes, I do personally think it’s important to work with an advisor who pledges to put your interests ahead of their own at all times. And while I do favor finding an advisor who adheres to the fiduciary standard 100% of the time, I also recognize that a professional doesn’t necessarily have to meet all of the technical and legal requirements in order to do good work and put their client's interests first.
I know many competent, honest financial advisors who hold themselves to an equally high standard of care and take great care of their clients but don’t meet the exact requirements that allow them to sign a letter stating that they are a fiduciary 100% of the time. Because the reality is that a relatively harmless business decision like opting to get paid to help clients secure low-cost term life insurance would immediately disqualify an advisor from adhering to the fiduciary standard 100% of the time.
They might meet the requirements in every other aspect of their business, but getting paid a commission on some term life insurance cases throughout the year is a situation where the fiduciary hat is not being worn.
Also, there are cases where the financial advisor truly does adhere to the fiduciary standard in every situation with their clients, but the firm they old their licenses with doesn’t meet all of the legal requirements. As a result, this would prevent the advisor from holding themselves out as a fiduciary 100% of the time since the structure of the firm takes precedence over how the individual advisors at that firm have structured their practice and how they charge for their services.
And sure, the advisor could certainly change firms and join one that does meet all of the requirements to be labeled as a fiduciary, but it’s not always as simple as leaving one company and joining another. It’s a big, complicated, decision that, might not only have a negative impact on them and their family, but it could also be a distraction from spending time and energy taking good care of their clients.
In the end, I think this issue really falls on the profession, the lack of experience and education requirements, and the lack of standardization of titles and designations. Until then, be prepared to sort through this maze on your own. And I’ll be prepared to accept that consumers will likely continue to trust banks, insurance companies, and credit card companies more than financial advisors, as highlighted by a recent MarketConsult survey.
So to continue on through this maze of confusing terminology, what if an advisor or advisory firm doesn’t adhere to the fiduciary standard? What sort of standard are they governed by when getting paid to give financial and investment advice to customers?
The standard is known as the “Suitability Standard” or “Suitability Obligation” and this is what most of the 300,000 advisors in this country adhere to or operate under. In short, advisors must have a reasonable basis to believe that their recommendations are suitable for the client's investment profile. A client's investment profile includes, but is not limited to, their age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the client discloses.
The advisor is also required to ensure fees are not excessive, but unlike a fiduciary advisor, they aren’t required to recommend the lowest cost solution or the highest quality. They just need to prove that the recommendation is suitable and that it benefits the client. An investment product can be expensive and/or lower quality compared to what else is out there, but it can still be suitable and meet the obligations set under the “Suitability Standard.”
To be extra clear, if an advisor earns any amount of compensation through commissions (the transactional fee structure we discussed last week), they would be operating under the Suitability Standard and not the fiduciary standard.
An advisor charging hourly fees, one-time project fees, flat fees, or a percentage of investments fee or AUM fee, would be operating under the fiduciary standard.
An advisor earning some fees from commissions and some fees through the other fee models would be operating under both standards. They would put their fiduciary hat on and take it off depending on the situation. Once again, these are known as hybrid firms, and while many hybrid firms do great work for their clients, the dual standard has, understandably, caused a lot of confusion.
Hopefully, I’ve cleared up that confusion today.
Now let’s clear up one more set of wildly confusing terms that relate to the Fiduciary and Suitability standard.
Those terms are fee-only and fee-based.
You might have assumed that fee-only and fee-based mean the same thing. Once again, our profession has done retirement savers any favors with these made-up terms that aren’t standardized.
But these two terms do in fact mean different things.
A fee-only financial advisor would also be considered a fiduciary 100% of the time. They do not earn any compensation in the form of commissions. The only compensation they receive is a transparent FEE paid directly by the client. This can be in the form of an hourly fee, one-time project fee, flat annual fee, or a % of assets fee (also known as a % of AUM fee).
I often refer to fee-only advisors as commission-free advisors. It’s more descriptive and more clearly highlights that these advisors can be compensated through any fee method except for selling transactional products in return for a commission.
On the other hand, a fee-BASED financial advisor would not be a fiduciary 100% of the time. These are the hybrid advisors or hybrid firms we discussed a few minutes ago who earn some compensation from commissions and some compensation from the other fee structures we’ve reviewed.
In some situations, they have their fiduciary hat on and charge a transparent fee for their advice, and in other cases, they have their suitability hat on and earn a commission for selling clients a product like an insurance policy, annuity, private Real Estate Investment Trust, or front-loaded mutual fund. They can wear both hats and it’s not always easy for the client to know what hat they’re wearing.
Similar to comments made earlier, I’m not here to suggest that fee-only advisors are good and fee-based advisors are bad. My goal is to define these terms and clear up any confusion so you can make an informed decision about the type of advisor that is the best fit for you.
On that note, I want to wrap up today's episode by providing some resources you can lean on for finding the most appropriate financial advisor.
Before I share those resources, I do want to quickly mention that my firm is looking to work with and help about 12 new families this year. Like a neurosurgeon, we remain highly specialized and are experts in tax and retirement planning for people over age 50 who have accumulated a nest egg of $1 million or more. We currently work with about 90 families all around the country, many of who have been longtime listeners of this podcast. And for what it’s worth, we are a fee-ONLY firm and do adhere to the fiduciary standard 100% of the time.
To help you evaluate our firm, we are currently offering a Free Retirement and Tax Analysis. Through this process, we will show you how you can lower your tax bill and improve retirement success, as well as answer your most pressing questions. We don’t hold anything back, allowing you to see exactly how we work, our approach to tax and retirement planning, and how we can help you if you choose to hire us.
To learn more about our Free Retirement Assessment and schedule an introductory call, head over to www.freeretirementassessment.com. That’s www.freeretirementassessment.com. And for your convenience, I’ll also provide a link to it in the episode description in your podcast app as well as today’s show notes.
If for any reason we don’t appear to have the right expertise to help you, or you just prefer not to complicate this podcast listener/host relationship we have, here are a few resources I would recommend to search for a financial advisor based on the criteria that are important to you.
The first is actually a combination of two similar resources and those are the CFP Boards “Find a CFP Professional” website (www.letsmakeaplan.org) and the Financial Planning Associations “PlannerSearch” website (www.plannersearch.org). The common thread between these two sites is that financial advisors listed must also be a Certified Financial Planner.
That said, both websites include advisors that adhere to both the fiduciary standard and suitability standard. They also include fee-only advisors and fee-based advisors. While this means that the databases are much larger than others, each site allows you to filter for the exact type of advisor you’re looking for. You can filter based on zip code, services provided, compensation structures, languages spoken, and more.
Once again those websites, which I’ll link to in the show notes, are letsmakeaplan.org and plannersearch.org.
The second resource to consider leaning on is the National Association of Personal Financial Advisors or NAPFA. The website is NAPFA.org and financial advisors listed on the NAPFA website must be fee-only and must also adhere to the fiduciary standard 100% of the time. The organization reviews each advisor member's Form ADV to confirm the criteria for both are met.
Similar to the CFP board website and FPA website, NAPFA.org also allows you to apply different filters to your search, helping you to narrow down a shortlist of advisors that you might consider interviewing.
The third resource I want to mention is the XY Planning Network or XYPN. Similar to NAPFA, the XY Planning Network is limited to advisor members who are fee-only and adhere to the fiduciary standard 100% of the time. In addition, their primary focus is on helping younger investors find a financial advisor, hence the name XY, referring to generations X and Y. So if you happen to be a younger retirement saver looking for professional help, this might be a good resource to consider.
That being said, there are still some firms, including mine, that are members of this network don’t work with younger professionals and specialize in helping people in retirement or close to it. The website for XYPN is www.xyplanningnetwork.com.
The fourth resource is primarily for people looking for limited-term engagements, specifically on an hourly basis. The organization is the Garett Planning Network and their website is www.garrettplanningnetwork.com. This network requires the advisor members listed to be fee-only, fiduciary, and a CFP Professional. They also require advisor members to offer services on an hourly basis. So if a short-term, hourly-based relationship is most suitable for you, this might be a good place to begin your due diligence.
The fifth and final resource to mention is one that I’ve brought up recently when talking about my upcoming book, More Than Money, and that is the Foundation for Financial Planning or FFP. Their website is www.ffpprobono.org and they are a non-profit organization dedicated to expanding access to pro bono financial advice.
So, if you or someone you know is in need of financial help but doesn’t have the resources to pay a professional, consider leaning on the FFP. You can also search for similar financial literacy organizations in your city. For example, in San Diego, we have the San Diego Financial Literacy Center. Other cities across the country have similar non-profit organizations that can be a great resource to those in need.
Lastly, while not necessarily a formal resource, you can also head straight to Google to do your own searching. You can type in different keywords based on what you’re looking for such as, “financial advisor near me” or “financial advisor in Boston” or even “financial advisor for physicians.”
You can also search for topics that advisors might have written about to help you find people who are experts in solving problems you might need help with. Topics like “Medicare IRMAA or How to Reduce IRMAA” or “Roth conversion pros and cons” or “Traditional vs Roth 401k.” Taking this route will, of course, require a lot more of your time since Google is not doing any filtering based on all of the criteria we have discussed in this series.
In other words, you might find a great article on creating income in retirement, but through your due diligence process, you might find out that the advisor's fee structure or philosophy who wrote the article doesn’t align with what you’re looking for. So, this path just might require a little more of your time upfront to find the right advisor, but it’s still a popular one to consider.
Ok, I know I referenced a lot of websites and resources in today’s episode. So if you missed one of them and you weren’t able to write it down, just know that I’ve linked to everything mentioned on today’s show notes which can be found by going to youstaywealthy.com/177.
Next week, I’ll be wrapping up this series by answering a handful of frequently asked questions that I regularly receive from retirement savers. Questions like, “How important is it for advisors to have designations like the CFP, CFA, or CIMA?”, “What are the best practices for firing a financial advisor or communicating to my advisor that I’m unhappy?”, “What is a financial coach “Would that be a good alternative to hiring a financial advisor?”, and more.
Once again, you can grab today's show notes by going to youstaywealthy.com/177.
Thank you, as always, for listening and I will see you back here next week.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.