Fiduciary Standard

How the Fiduciary Standard Protects You

In late February, President Obama gave a 17-minute speech at AARP’s headquarters about an issue that affects the retirement prospects of millions of Americans. In his speech he highlighted the lack of uniform standards and rules of conduct that require financial advisors to act in the best interests of their clients. This is not really a new issue; it is a matter that has been discussed many times, but each time the issue has been brought up proposed regulations have inevitably fizzled out in Congress. You may not be surprised to learn that some parts of the financial services industry are vehemently opposed to a uniform standard of conduct because it represents a threat to their business model and profitability.

The issue really boils down to the fact that there are two types of financial advisors: advisors who operate under the fiduciary standard, and those who do not. The fiduciary standard of care concept is not particularly difficult to understand, although most Americans probably aren’t aware of its importance or implications. The fiduciary standard of care requires the financial advisor to put the client’s interests first, and is considered the highest level of customer care under the law. Registered Investment Advisors (RIAs), like Bollin Wealth Management LLC, and their investment advisor representatives operate under the fiduciary standard.

On the other hand, advisors working as registered representatives of broker dealers (i.e. brokerage firms) and insurance agents are obligated to only work under a suitability standard, a much-less rigorous standard of care. Under the suitability standard the advisor is only required to make recommendations that would be considered ‘suitable’ for the client’s particular circumstances such as, age, time horizon, risk tolerance, and wealth. Under the suitability standard, there is no expectation that the advisor will act in their clients’ best interests and there is a lot of gray area in defining suitability.

Another key difference in the two types of advisors is the manner in which they are compensated. According to a report issued by the White House Council of Economic Advisors regarding this matter, “Advisors who do not accept conflicted payments charge an hourly rate or a percentage of assets or other fees that do not directly depend on the investment decisions made by the client. Advisors accepting conflicted payments face a conflict of interest because the advice that is best for their own bottom line may not be the advice that’s best for their customers’ savings.” The report further explains the types of payments that create conflicts of interest: revenue sharing arrangements, 12b-1 fees, front-end loads, back-end loads, sales targets and variable commissions on insurance and annuity products.

While the report got a great deal of the compensation discussion right, they are technically not correct in their conclusion that fee-based compensation is not subject to conflicts of interest. There are still some small conflicts of interest that can arise from fee-based compensation on a percentage of assets managed, or on an hourly rate. Nevertheless, the fee-based compensation model is vastly superior to the commission compensation model in reducing conflicts of interest between advisors’ compensation and the advice they deliver.

One of the arguments made most frequently by those in the financial services industry who oppose a universal fiduciary standard is that it would restrict some consumers’ access to financial advice because of the high asset minimums required by some RIAs to become a client. This argument is pure baloney! The advisory fee model is extremely scalable and can work for clients with $10,000 of investable assets just as well as it works for those with $10 million. The real reason for the stance against the fiduciary standard is that the fiduciary standard and accompanying fee-based compensation model are a significant threat to their commission compensation revenue stream.

As I mentioned earlier, we’ve been down this road before in trying to adopt a uniform fiduciary standard, so I’m not overly optimistic that something will get done anytime soon. To be completely honest with you, I hope that the status quo of two standards of conduct continues because my firm has a competitive advantage with savvy consumers who wish to work with a fee-based financial planner who operates under the fiduciary standard.  And in reality you do not need the fiduciary standard to be adopted either, because I am going to show you how to find an advisor who adheres to the fiduciary standard of conduct.

One of the easiest ways to get a tremendous amount of information on any financial advisor is through the BrokerCheck feature on the Finra website (  In fact, using BrokerCheck can help investors avoid a lot of potential problems and headaches before they start working with the wrong advisor.  Using the BrokerCheck feature of the website you can find out important information such as:

  • If the advisor is registered with any regulatory agencies. Tip: if the advisor does not show up in a BrokerCheck search there is a good possibility the person you are searching for is an insurance salesperson and will not provide objective advice.
  • How the advisor is registered: as a broker dealer registered representative, investment advisor representative, or both. If you want someone to act with the fiduciary standard of care, you want to find an advisor registered as an investment advisor representative.
  • Any disclosures the advisor might have, including client complaints, employment terminations, bankruptcies, or other important disclosures. Tip: If there are too many disclosures on an advisor’s BrokerCheck report, it may be advisable to pass that advisor up. Where there is smoke, there is usually fire.
  • Which regulatory exams they have passed.

Another way to find out if your potential advisor is a fiduciary is to request their From ADV Part 2. Every Registered Investment Advisor is required to provide a Form ADV Part 2 prior to working with a client. Within the Form ADV Part 2 you will find every detail about the advisor’s services, compensation structure, educational and career background and more.  If they cannot produce a Form ADV Part 2 upon your request, then move on to the next candidate.

You can also utilize the search services of organizations made up of advisors who are likely to act as fiduciaries (just follow the other steps listed above to verify that they are fiduciaries). The Financial Planning Association (, Certified Financial Board of Standards ( and National Association of Personal Financial Advisors ( all have search features to help you identify vetted professionals near you.

If you stop and think about it, after your health and your family, the most important thing for most people is the wealth they have accumulated during their lifetime. You would not choose a doctor who only provided ‘suitable’ diagnoses or treatments for you, or a family member.  You want a doctor who makes recommendations that are in your best interest.  Why should your financial advisor be held to a lower standard?   Finding a financial advisor who will operate as a fiduciary for you is not difficult, just follow the steps I recommended and you will be well on your way to enjoying a secure retirement.