How to find a financial advisor who puts you first

How do you know if your advisor is acting in your best interest?

People seeking advice to live better financial lives have more options than ever. They turn to friends and family, colleagues, websites, social media, and robo-advisors that provide automated portfolio advice based on their preferences.

While some of these sources of financial planning may be more reliable than others, the important idea is for you to understand the level of financial advice you need based on your personal goals and values, age, wealth, risk tolerance, and other factors. As your needs become more sophisticated, so should your chosen source of financial planning advice.

Choosing a financial advisor that’s right for you can be complex, but there’s one choice that can be very simple: the choice between an advisor held to a fiduciary standard, or one who is not.

Based on my years in financial services, this decision can have lifelong impacts. It is one of the most important financial decisions people can make. Let’s look at the current standards:

Broker-Dealer Best Interest Standard

This applies to broker-dealers and was established by the Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) in 2019. Under this standard, broker-dealers must:

• Act in the best interest of their retail customers when making recommendations about securities transactions or investment strategies.
• Disclose conflicts of interest and take steps to mitigate or eliminate them.
• Exercise reasonable diligence, care, and skill when making recommendations.

The Reg BI standard does not require advisors to monitor accounts continuously or provide ongoing advice.

Certified Financial Planner (CFP?) Fiduciary Standard:

?CFPs are held to a fiduciary standard, which is generally considered a higher standard of care. Under this standard, CFPs must:?

• Act in the best interest of their clients at all times when providing financial advice.
• Adhere to a duty of loyalty and place their client's interests above their own.
• Provide comprehensive and ongoing financial planning advice.
• ?Avoid or fully disclose and manage all conflicts of interest.

Key differences include:

1. Scope: The fiduciary standard applies to all aspects of the financial planning relationship, while the best interest standard applies primarily to specific recommendations. The Reg BI standard covers only individual investors seeking investment advice; it doesn't apply to financial planning, taxes, insurance, benefits, retirement plans, or estate planning.

2. Continuity: CFPs have an ongoing duty to their clients, while broker-dealers' obligations are generally transaction-specific.

3. Conflicts of interest: While both standards require disclosure of conflicts of interest, the fiduciary standard is generally stricter in requiring CFPs to avoid conflicts where possible.

4. Compensation model: Broker-dealers often work on a commission basis, which can potentially create conflicts of interest. CFPs typically use fee-based models, which can align their interests more closely with those of their clients.

5. Regulatory oversight: Broker-dealers are primarily regulated by the Financial Industry Regulatory Authority?(FINRA) and the SEC, while CFPs are overseen by the CFP Board and other regulatory bodies.

6. Breadth of advice: CFPs typically provide comprehensive financial planning services, while broker-dealers may focus more on investment products and transactions.

Choose an advisor who meets your standards

In my admittedly subjective opinion (as someone with a CFP? after his name), the Broker-Dealer BI Standard might be improved by clarifying certain points and adopting a broader scope. CFPs are required to act in the client's best interests for all financial advice, whether you are an individual investor or an institutional client. ?

In practice, the fiduciary standard is often considered more stringent and client-focused than the best interest standard. However, it's important to note that both standards aim to protect investors and ensure that financial professionals act in their clients' interests.

People should understand which standard applies to their financial planner and how that might affect the advice and services they receive. They should also feel comfortable asking questions about how their advisor is compensated and how they manage potential conflicts of interest.

What to ask prospective advisors When evaluating potential advisors, it’s crucial to ask the right questions to ensure they are a good fit for your unique needs. Here are some essential questions:

• Are you held to the best interest standard, or fiduciary standard?
• Do you offer full-service financial planning?
• What will your services cost me?
• What is your investment philosophy? (Your advisor’s philosophy should complement your own).

Choosing a fiduciary is a significant step towards securing your financial future with confidence. Questions? Need further clarification? Leave a comment below. We're here to help!