When Choosing a Financial Advisor, Make Sure You Know Their Standard of Care

Couple having discussion with advisor

Thinking of hiring a financial advisor to help with your retirement planning? Before you do, make certain you’re choosing the professional who will always put your interests first.

The surprising truth is, not all financial advisors are held to the same standard of care. Some are able to blur the lines between advising and selling, while others follow strict ethical guidelines and specific laws to ensure objectivity and transparency. In this blog post, we’ll review standards of care for financial advising and explain how they determine the manner in which advisors make their investment recommendations. We’ll also share tips on how to select a financial advisor who follows the highest standard of care.

Let’s start with a summary of the two standards: suitability and fiduciary.

 

The Suitability Standard

A financial advisor who adheres to the suitability standard can more accurately be described as an investment broker. The broker recommends financial products that are suitable because they generally fit your client profile, even though they might not specifically be in your best interest. For example, the broker could suggest higher-priced funds that would earn them a commission instead of lower-priced options that would deliver comparable or even additional benefits to you, the client. Given the leniency of the suitability standard, the broker is free to offer you financial advice that involves selling their financial products. The question is whether that product is the best solution for your needs.

Brokers who act as financial advisors are regulated by the Financial Industry Regulatory Authority (FINRA), a private nonprofit organization.

 

The Fiduciary Standard

An advisor who acts as a fiduciary is legally and ethically bound to provide advice exclusively focused on what’s best for you. When completing a buy or sell order on your behalf, for instance, they must do so in accordance with the “best execution” law, which requires that the trade be completed in an order that maximizes your financial benefit. A fiduciary doesn’t work on commission and isn’t permitted to make recommendations that prioritize their profit.

Fiduciary financial advisors are considered investment advisor representatives (IARs), and they work for registered investment adviser (RIA) firms. In accordance with the Investment Advisers Act of 1940, fiduciaries are regulated by the US Securities and Exchange Commission (SEC) to ensure they uphold the fiduciary standard.

Here are the three core advantages of working with a fiduciary financial advisor:

  • You have access to more investment options – A fiduciary is investment-agnostic when it comes to selecting possible investment solutions. Because they’re not motivated by commissions or sales quotas, they can offer a greater variety of higher-quality, lower-cost investment products.
  • The business relationship offers full transparency – A fiduciary is required by law to disclose all fees and any information that might be potentially relevant to the advice they’re giving you. You, as the client, will have all the facts you need to make an informed decision about a solution being presented.
  • Because there are fewer conflicts of interest, you’ll have a greater level of trust – With a fiduciary financial advisor, you’ll always know that the recommendations you receive are centered on your needs alone.

 

How to Tell If an Advisor Is a Fiduciary

One of the easiest ways to distinguish between an advisor who follows the suitability standard and one who follows the fiduciary standard is to confirm how they get paid. Is the compensation structure fee-only, fee-based, or commission? In other words, is the advisor paid only a fee, which might be flat or fixed-percentage, or do they earn a commission on top of a fee? Choosing a financial advisor who is fee-only will increase the chances of them following the fiduciary standard.

Another way is to find out if they hold any special licenses or certifications. In addition to being an IAR, an advisor might hold the CFP® designation, which indicates a very high standard of care. CFP® stands for CERTIFIED FINANCIAL PLANNER, and licensed CFP® professionals are regulated by the CFP® Board, a nonprofit organization that provides yet another layer of fiduciary oversight. In accordance with the CFP® Board’s strict code of ethics, every CFP® professional is required to:

  1. Act with honesty, integrity, competence, and diligence.
  2. Act in the client’s best interests.
  3. Exercise due care.
  4. Avoid or disclose and manage conflicts of interest.
  5. Maintain confidentiality and protect the privacy of client information.
  6. Act in a manner that reflects positively on the financial planning profession and CFP® certification.

 

Questions to Ask When Choosing an Advisor

“Trust is the glue of life,” wrote author and business executive Stephen R. Covey. You’ve worked very hard to save for retirement, and at the end of the day, you want to be sure your financial advisor is working for you.

Here are four questions you can ask when interviewing a potential financial advisor:

  • Do you adhere to the suitability standard or the fiduciary standard?
  • Are you an IAR working for an RIA, or are you a broker?
  • Do you earn a commission?
  • Do you hold any other licenses or certifications?

Knowing the answers will enable you to make an informed decision about how your wealth will be managed. It will also reassure you about the trustworthiness of the person you hire to manage it.

 

Ready to Connect With the Fiduciaries at Level?

At Level, we understand that trust is the foundation of a professional relationship, especially one focused on financial planning. We make it our business—literally—to look out for your interests and provide the most effective strategies. We’re fully committed to helping you maintain your wealth so you can achieve your retirement goals. Talk to one of our trusted financial advisors today. Click here to set up a free consultation or call 716-634-6113.

 

About Level Financial Advisors

Since 1979, Level has helped countless individuals and families in the greater Buffalo area retire with dignity, achieve their financial goals, manage their wealth, minimize taxes, and leave behind a legacy. And unlike other so-called financial “advisors,” our CERTIFIED FINANCIAL PLANNER professionals are fiduciaries in the truest sense. We aren’t compensated for the products we sell, and we don’t work on commission, so you can be confident our advice is in service of your goals—not our own bottom line.

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