Why Working with a "Fiduciary" Financial Advisor May Not Be What It Seems
Across North Carolina and the nation, many financial advisors advertise themselves as “fiduciaries.” This term often leads consumers to believe that these advisors are always obligated to prioritize their clients' interests. However, the regulatory landscape can create confusion and misperceptions for consumers. Let's dive into the nuances of this framework to understand why working with a fiduciary financial advisor may not be what it seems.
SEC Standard of Conduct for Investment Advisers
In 2018, the SEC adopted an interpretation of the Standard of Conduct for Investment Advisers under the Investment Advisers Act of 1940 (the 1940 Act). This act mandates that advisers adhere to a duty of care and a duty of loyalty, essentially acting in their clients' best interests. This interpretation paved the way for the SEC to implement Regulation Best Interest (Reg BI).
Does Reg BI Require Advisors to Serve as Fiduciaries?
Regulation Best Interest (Reg BI) does not obligate broker-dealers and their registered representatives to act as fiduciaries. Instead, it sets a "best interest" standard for recommendations made to retail customers. While this standard seeks to ensure that broker-dealers consider their clients' best interests, it does not equate to the comprehensive fiduciary duty that requires advisors to place clients' interests above their own at all times.
The Misleading Marketing of Fiduciary Status
A significant source of confusion arises from advisors who claim to be fiduciaries but operate under different capacities. Some advisors establish a Registered Investment Advisor (RIA) firm, which by law, must adhere to the fiduciary standard under the 1940 Act. However, these same advisors might also work as commissioned insurance agents, selling high-commission products like fixed index annuities.
When acting as insurance agents, these advisors are not serving under the fiduciary standard of the 1940 Act, nor are they subject to Regulation BI. This dual role is often referred to as “wearing two hats”—sometimes acting as a fiduciary (or merely promoting the notion) and other times selling commission-based insurance products. This arrangement presents a conflict of interest since the advisor may recommend products based on the commission they receive, rather than the client's best interest.
The most concerning aspect is that it can be challenging for clients to discern when their advisor is acting in which capacity. This ambiguity can lead to situations where clients believe they are receiving fiduciary advice, but instead, are being sold high-commission products.
What Makes a Fee-Only Advisor Like Ark Royal Different
A fee-only advisor distinguishes themselves by only being compensated through fees paid directly by the client, rather than commissions from product sales. This structure ensures that fee-only advisors are always and only serving as fiduciaries. They offer conflict-free advice because they do not have financial incentives tied to specific products or services.
To put it simply, while not all fiduciary advisors are fee-only, all fee-only advisors are fiduciaries. If you want assurance that your advisor is consistently and solely acting in your best interest, working with a fee-only advisor is the most reliable choice.
Understanding these distinctions can help you make more informed decisions when choosing a financial advisor, ensuring that your interests are truly prioritized. At Ark Royal we're proud to work with clients as fee-only advisors. No gimmicks, no misdirection - just sound financial advice.