How do you know if your financial advisor has a conflict of interest? Many people don’t realize that their financial advisor may be recommending products and services that benefit themselves, more than they benefit their clients. In order to protect yourself from potential breaches of trust, it is important to know how conflicts of interest can arise and what you can do to reduce your exposure to them.
This article will describe different types of conflicts of interest that investors can encounter, as well as tips for finding an advisor who is free from these potential conflicts:
- What are frequent examples of conflicts of interest with a financial advisor?
- What is the difference between suitability and the fiduciary standard?
- Is your current advisor a financial fiduciary?
- What is the difference between brokers and financial advisors?
- Why should I obtain answers in writing?
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What are frequent examples of financial advisor conflicts of interest?
Following are some questions you should be asking a financial advisor about potential conflicts of interest that are tied to their compensation:
- Are you recommending any proprietary products or services?
- Do you receive any enhanced compensation for the sale of these products?
- Do you receive compensation for the sale of third-party products?
- Do companies paying higher commissions pose conflicts of interest?
- Do you or your firm have any relationships with product manufacturers or distributors that could influence your recommendations?
If the answer to any of these questions is yes, it would be prudent to ask additional questions that protect your financial interests.
What is the difference between suitability and the fiduciary standard?
When it comes to investing, there are two standards that are based on the advisors licensing and registration – the fiduciary standard and the suitability standard. While they may sound similar, these two standards have very different implications for investors.
The fiduciary standard is a legal term that refers to a higher duty of care for registered investment advisors who have a position of trust in relation to their clients. This higher standard means advisors must always act in their clients’ best interests. This includes disclosing any potential conflicts of interest that may have adverse consequences for their clients.
The suitability standard, on the other hand, is less stringent and is subject to significant interpretation. Brokers and other registered representatives are required to make suitable recommendations that are based on their extensive knowledge of their clients’ needs, circumstances, goals, and risk profiles.
It’s important to understand which standard applies to your relationship with a wealth manager. One way to make this determination is to know how your advisor is compensated. Financial fiduciaries are compensated with fees (asset-based, fixed, subscription, hourly) and brokers are traditionally compensated with commissions. This is a distinguishing characteristic that will help you determine the standards that apply to financial advisors and brokers.
If your current advisor isn’t a fiduciary, you should ask how they are compensated, by whom, and how much. You should also know what amount of their compensation they receive from third-parties.
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How do I know if my advisor is a fiduciary?
It can be in your best interest to select a financial fiduciary to help you plan your future and invest your assets. To determine if an advisor firm is a fiduciary, look up whether they are a registered investment adviser via the U.S. Securities and Exchange Commission’s website (www.adviserinfo.sec) and view their regulatory disclosure. Additionally, you can check if your financial adviser is a fiduciary via the National Association of Personal Financial Advisors (NAPFA)’s website.
Are all financial advisors fiduciaries?
All financial professionals, who claim to be advisors, are not fiduciaries, so proceed with caution. It is also important to note, anyone can claim to be a financial advisor, so the title is not indicative of the advisors’ fiduciary status.
Financial advisors who work for brokerage firms are not always bound by the fiduciary standard that requires them to do what is best for their clients.
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Is your current financial advisor a financial fiduciary? If the answer is yes, the advisor is obligated to always act in your best interests and disclose any potential conflicts of interest. If the answer is no, you may find the advisor is compensated with commissions for the sale of investment and insurance products. Therefore, the advisor is not obligated to act in your best interests or disclose potential conflicts of interest.
At Brown | Miller, we are a privately owned, independent, and fee-only registered investment advisor firm that is located in the Washington D.C. area.
Most importantly, we are financial fiduciaries who are required to provide advice and services that put your financial interests first.
Schedule an introductory appointment to discuss ways we can help you achieve your financial goals.