“I’m just so tired of agreeing to meet with a financial advisor to get help with financial planning, having a good first meeting, being promised a financial plan, then getting into the second meeting and being pitched an annuity or whole life insurance policy.”
The anecdote above was shared with me almost verbatim by two separate business owners who were looking for real financial advice from a fiduciary financial advisor. Instead they got trapped in a sales meeting with a broker.
As frustrating as that is, experiences like the one above are not uncommon. Here’s another one I heard from a woman who reached out to Spark Financial Advisors looking for fiduciary advice:
“I called my financial advisor at (large mutual insurance company) to tell him I got a raise at work, and ask him what I should do with the extra money. He suggested I buy a whole life insurance policy instead of boosting my 401(k) contribution. I’m just not sure that’s the right thing to do.”
Spoiler alert: it’s probably not, and here’s why. She had no dependents, no taxable estate, she wasn’t saving enough for retirement, and a whole life insurance policy was an inappropriate recommendation for her. It was however, a potentially very profitable recommendation for her financial sales representative.
Stories like that are incredibly irritating. Here are people who are trying to do the right thing, they are seeking financial advice and instead they’re being pitched products by salespeople. Those inappropriate products and bad advice could have painful long-term impacts on their future financial health.
The lack of fiduciary duty owed to clients by the major financial broker-dealers is a huge issue for people in the U.S. looking for unbiased financial advice. A study by Personal Capital showed that nearly half of Americans (48%) believe that all financial advisors are required by law to act in their client’s best interests.
That’s simply not true.
In this article we will explain why it’s important to work with a fiduciary financial advisor, explain who is a fiduciary and who is not, and how you can tell if your advisor is a fiduciary. If you are seeking a fiduciary financial advisor in Richmond, VA or Williamsburg, VA keep reading. This article is for you.
What Does It Mean To Be A Fiduciary Financial Advisor?
The general definition of a fiduciary is relating to confidence or trust, according to Merriam-Webster Dictionary. Taking that a step further, a fiduciary must:
- Demonstrate Loyalty
- Act With Due Care
What does it mean to “demonstrate loyalty?”
A fiduciary must avoid conflicts of interest. A conflict of interest occurs when the interest of the advisor or the advisor’s firm conflict with the client’s interest. Although fee only financial advisors have fewer conflicts of interest, it can still happen. A true fiduciary is required to avoid or eliminate these conflicts.
If the conflict can not be avoided it must be fully disclosed and mitigated.
A fiduciary must hold the client’s interests ahead of their own personal, and their firm’s interests, at all times.
This is why financial representatives who work for, or are affiliated, with a broker-dealer can not be a true fiduciary. They owe a duty of loyalty to their broker-dealer before you as the client. Instead, they give advice based on a lower standard of care known as the “suitability standard.”
According to Investopedia, the suitability standard loosely means that if the broker-dealer must believe their recommendation “will truly benefit their client.”
Insurance agents do not have a fiduciary responsibility to their clients, instead they are required to act with reasonable care. This is fine if you are going to an insurance agent expecting to purchase a product. If you are looking for financial planning, it could be an issue.
Each year at Spark Financial Advisors we see clients who come to us looking for a fiduciary financial advisor who went looking for real financial advice and instead were sold annuities in their IRAs with fees in excess of 2% each year, or a variable universal life insurance policy that doesn’t provide enough coverage to their families in case of an untimely death.
That’s not right. People deserve better and it drives us to guide our clients to & through financial independence as fee only fiduciaries.
(Note: As fee only fiduciary financial advisors we do not sell insurance or annuities. We do help clients evaluate their needs and work with their insurance agent or an independent insurance broker to implement that portion of their financial plan. We do not receive any referral fees, commissions, or kick-backs for our work. Our clients pay us directly for professional advice.)
At Spark Financial Advisors we will sign an oath of fiduciary responsibility to our clients. In fact, a sample of it is included at the end of this article.
A Fiduciary Must Act With Due Care
An individual who is acting as a fiduciary on behalf of their clients must only give advice in areas for which they have competent, professional knowledge. A fiduciary investment advisor must follow a prudent investment process. To give advice to a client in an area for which an advisor is not competent can come at a great cost to the client, even if the advisor is well-intentioned.
How can an individual seeking a fiduciary financial advisor determine if the individual they are speaking with is competent? Individuals who are CERTIFIED FINANCIAL PLANNERS are a good place to start. While the CFP® designation does not provide a guarantee, it does set a bar for educational attainment (proven by passing a rigorous exam) and experience..
A Fiduciary for Business Owners and High Income Couples
Business owners and dual-career couples have a heightened need for a fiduciary Certified Financial Planner. They must consider the risk exposures to building financial independence that are inherent in owning a business or having a high income. Both of these groups have a great deal of opportunity to use their strong cash flow to build financial independence, if it’s used wisely and not siphoned off into high commission products. By using their cash flow wisely high income earners can materially improve their lifestyle and retirement outcomes. A fee only fiduciary CERTIFIED FINANCIAL PLANNER can help high earners maximize their money and still give advice around client’s insurance and risk management needs without the conflict of getting paid on insurance policies.
Where It Gets Trickier: Fiduciary Investment Adviser vs. A Full-time Fiduciary
To complicate matters, it is possible for an individual to work for a Registered Investment Advisor (with a fiduciary duty to you in the matter of investments) and a registered representative of a broker-dealer (held to the lower suitability standard). This means the advisor acts as a fiduciary to you while managing your investments; but they are held to the lower suitability standard when selling insurance, annuities, certain investments and 529 plans.
This is part of why people are so confused about who is a fiduciary. Certain advisors tell clients they are a fiduciary but don’t clearly explain that they aren’t acting in a fiduciary capacity when they are selling annuities, insurance, etc.
How can you determine if the person you are interviewing is a dual-registered representative?
If you’re talking to them don’t be shy about asking them if they are a dual-registered advisor and ask them how they are compensated.
If you’re on their website, they may refer to themselves as “fee based.” A “fee based” actually means “fees and commissions.” The term fee based is a term meant to confuse consumers who are looking for fee only financial planners. CERTIFIED FINANCIAL PLANNERS are not supposed to use the term “fee based” at all because it was deemed to be so misleading by the CFP® Board.
A fee only financial advisor never receives any commissions, referral fees, or other kickbacks. A fee only financial advisor is paid directly by their clients.
You can also read a firm’s ADV. In Item 10 of a Registered Investment Advisor’s ADV (which should be available on their website or distributed to you before you sign a client agreement) you can see what other affiliations a firm has. A firm is affiliated with a broker-dealer if they are dually-registered. This means they work for a Registered Investment Advisor firm and they also work for a broker-dealer.
Seek out a full-time fiduciary. Someone who acts in your best interest at all times, not simply when giving investment advice.
Why Work With A NAPFA-Registered Advisor
NAPFA-registered advisors take their fiduciary responsibility very seriously. As we discussed earlier, an important component of the fiduciary standard is the ability to “Act with Care” which requires professional competence. To become a NAPFA-registered advisor a financial planner must have advanced knowledge, three years of experience, commit to comprehensive financial planning, and submit a financial plan for peer review. NAPFA members must also complete 60 hours of continuing education every two years, which is twice the CFP® Board’s requirement.
NAPFA also takes a very stringent view of what it means to be Fee-Only. Here’s a quote from their website:
“NAPFA defines a Fee-Only financial advisor as one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.
“Fee-offset” arrangements, 12b-1 fees, insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.”
At Spark Financial Advisors we are proud to be NAPFA members and have invested considerable time volunteering on behalf of NAPFA on the South Region Board and via NAPFA’s pro-bono organization.
Finding a Fiduciary Financial Advisor in Richmond, VA or Williamsburg, VA
If this is making your head spin, you’re not alone. Fortunately, if you are looking for a fiduciary financial advisor you have come to the right place. At Spark Financial Advisors we take our fiduciary duty very seriously. We believe serving clients as a fee-only fiduciary is the best way to help business owners and dual-career couples reach their financial goals.
Here’s a copy of the fiduciary oath we share with clients:
I believe in placing your best interests first. Therefore, I am proud to commit to the following five fiduciary principles:
I will always put your best interests first.
I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
I will avoid conflicts of interest.
I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
If you’re ready to take the next step on the road to financial independence use the button below to book a free call with us. We look forward to hearing from you.
Questions for Lauren?
Financial planner and advisor, Lauren Zangardi Haynes, CIMA®, CFP®, works with business owners and leaders in Richmond and Williamsburg, VA. She also works virtually with clients nationwide. As a fiduciary, she offers comprehensive Fee-Only financial planning and investment advisory services so you can live your dreams with confidence.
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