Home > Personal Finance > Is Your Financial Adviser Really Working for You?

Comments 0 Comments

Several weeks ago, during a regular face-to-face chat about my Roth IRA investment choices, I asked my financial adviser if he’d be willing to sign a fiduciary pledge.

I’d read a bit of the buzz about fiduciary pledges and the fiduciary duty behind them and knew just enough to be curious about my own adviser’s willingness to sign. I even prepared for this part of our conversation by printing out a fairly standard fiduciary pledge and having it ready for him to review, consider, and (perhaps) sign.

Here’s what it looks like:

Fiduciary Pledge

I, the undersigned, ___________________________ (“financial advisor”), pledge to
always put the best interests of ________________________________ (“client”) first, no
matter what.
As such, I will disclose in writing the following material facts and any conflicts of
interest (actual and/or perceived) that may arise in our business relationship:

  • All commission, fees, loads, and expenses, in advance, client will pay as aresult of my advice and recommendations;
  • All commission and commissions I receive as a result of my advice and recommendations;
  • The maximum fee discount allowed by my firm and the largest fee discountI give to other customers;
  • The fee discount client is receiving;
  • Any recruitment bonuses and other recruitment compensation I have or will receive from my firm;
  • Fees I paid to others for the referral of client to me;
  • Fees I have or will receive for referring client to any third-parties; and
  • Any other financial conflicts of interest that could reasonably compromisethe impartiality of my advice and recommendations.

Advisor: _____________________________________ Date: _____________________

So how did my adviser react upon reading this pledge? His reaction was, in a word, disappointing.

He stammered through his response, claiming he’d never heard of a fiduciary pledge and had never been asked to sign one before. I was getting ready to do some serious backtracking and apologize for my affront when he agreed to take a copy of the pledge for his superiors to review. A few days later, he called to inform me that he would be unable to sign.

The whole awkward and unsettling experience got me thinking: How many other people have been in the same boat? How important are fiduciary pledges and what are the implications if your longtime financial adviser declines to sign one?

What’s a fiduciary?

If you’re new to the topic of fiduciary pledges, a definition is in order: A fiduciary pledge is essentially a promise made in writing by brokers, financial advisers or other types of money managers to follow a fiduciary standard of conduct — that is, to always act in good faith and in the best interest of their clients and to put clients’ financial well-being ahead of their own. Fiduciary pledges outline any potential conflicts of interest, relevant financial facts, and commissions, fees or bonuses that an adviser may receive as a result of his advice.

This sounds so straightforward and sensible that you may ask yourself, “Well, aren’t financial advisers and brokers required by law to do this anyway?” The short answer, unfortunately, is no. As surreal as it may sound, some folks who are dispensing financial advice these days are simply salespeople with impressive-sounding titles and they may be skewing their investment suggestions to favor those products that pay richer commissions.

Fiduciary vs. Suitability

You might be wondering: If the person I’m trusting for financial advice won’t agree to act as a fiduciary, exactly what is that person’s responsibility? The answer is, most commission-based financial advisers are held to a lesser standard, known as suitability.

While a fiduciary agrees to put your interests ahead of his own, suitability means he is only required to suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.

An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a good investment for you would be a stock mutual fund. There are two similar funds available. One charges a 5% commission and the other 2%. A fiduciary would be honor-bound to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays him the higher commission, because either fund is suitable.

In a brief conversation I had with former investment adviser and Money Talks News founder Stacy Johnson about this topic, he didn’t mince words:

Thanks to lobbying by the financial services industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 without this important consumer protection. Now it’s up to consumers to force the industry to act in our best interests by shunning any adviser or company that refuses to act according to the fiduciary standard of conduct.

The Burden Is on You

As Stacy points out, the burden lies with consumers to determine if the financial professional they’re working with is giving advice based on sound investment strategy or murkier motivations like commissions and behind-the-scenes bonus structures that favor one investment product over another. To be clear, signing a fiduciary pledge in no way suggests that your financial adviser can’t make a profit. It simply assures that his profit won’t come at your expense — an important distinction.

So, what do you do if you find yourself in the uncomfortable position of having a trusted financial adviser decline to sign a fiduciary pledge? Is it worth ending the relationship and seeking counsel from a more willing and candid money manager? Stacy thinks so:

I’m sure there are honest, dedicated advisers whose companies simply won’t allow them to sign a fiduciary pledge. But I’d only work with such an adviser until I found a different one whose firm didn’t mind explicitly guaranteeing that they put customers’ interests ahead of their own. And pledge or no pledge, consumers shouldn’t work with any financial professional who’s compensated through commissions. It sets the stage for blatant conflicts of interest.

As the new year approaches, I’ve made a little note in my daily planner that reads, “research new investment professional” and I intend to do just that. To be fair, I don’t think my current adviser has led me astray, but then again, I’m operating with only limited information, and that appears to be by design. That’s the downside to money managers who choose not to make a fiduciary promise — their integrity is called into question whether it’s deserved or not.

One thing I’m sure of: As my investment goals change and my financial picture gets more complex with age, I’ll need an adviser who’s not only knowledgeable, but utterly transparent and guided by the quite reasonable expectation that my financial well-being supersedes his own interests.

With this issue, consumers must begin to demand that all investment professionals who dispense advice be held to a fiduciary standard of conduct. Those who are unwilling or unable should, understandably, be called out.

This post originally appeared on Money Talks News.

More from Money Talks News:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team