The financial services profession does a poor job of transparency when it comes to the obligation advisors owe clients. I suspect the primary reason for this is because some advisors want to make it seem like the client’s interest are paramount, when in fact, they aren’t.
Let’s look at an example. Tom is a CFP® working for a brokerage firm. He is compensated via commissions on the sale of mutual funds and annuities. Under this scenario what duties does Tom owe his clients?
Tom has two differing governing structures with which he must comply; FINRA which regulates the securities industry and the CFP Board which regulates those with the CFP® credential. Under FINRA, Tom has a “suitability standard of care” which means the investment recommendations he makes need not be the best, nor the least expensive, but merely suitable for the client.
Can an advisor, like Tom, be a fiduciary and still receive commission compensation? According to the CFP Board the answer is “yes.”
Under the CFP Board Code of Ethics and Standards of Conduct, Tom should seek to avoid conflicts of interest and must disclose them if they occur. Under these rules disclosing compensation conflicts (getting a higher commission from Fund A versus Fund B) allows an advisor to receive commission compensation and still serve in a fiduciary capacity.
Simply stated, an advisor serving in either a fee-based or fiduciary capacity doesn’t ensure the client that the advisor is free of compensation conflicts. In fact, the term “fee-based” has no universal definition and isn’t a standard recognized by the CFP Board.
The only way to be sure that your advisor is free of compensation conflicts is to work with a fee-only advisor. We are proud to serve our clients as a fee-only advisor!