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You Need a Fiduciary

November 3rd, 2015 at 05:59 pm

One of the really important concepts when dealing with professionals and your money is that of a fiduciary. A fiduciary has both a legal and ethical requirement to put your needs before their own. They *cannot* profit at your expense. Here is the tricky part. The list of people who actually are fiduciaries is pretty short. Attorneys, CPAs, Enrolled Agents (not an insurance agent, and Enrolled Agent is someone who can represent you when the IRS is involved) and Registered Investment Advisors (RIAs). That's the list. *Anyone* else, is legally allowed to put their needs first. That means that CFPs, Registered Reps, Financial Advisors, CLUs, Investment Managers, etc, etc. are not held to the fiduciary standard.

Here is a scenario. A Registered Rep (stock broker) has determined that a utility mutual fund would be suitable for you. A registered rep has a lesser standard of 'suitability'. He has narrowed it down to 2 mutual funds. One will pay him a $500 commission, the other will pay him a $1,000 commission. There is no problem with him recommending the one with the higher commission (which of course comes out of your pocket). It's suitable, so it's fine. A fiduciary can not do this. He/she must recommend the one that's in your best interest, the one that costs you less.

Now that does not mean that those other professionals are working against you. But the point is they are not legally required to always put you first.

So what I recommend is, if you're not dealing with a fiduciary, get one involved to check out who you are working with. Paying a CPA or an RIA for an hour of their time to look at what your guy/gal is doing might be a really good investment.

Posted in Investing, Personal Finance, Retirement, Saving Money | 2 Comments »

2 Responses to “You Need a Fiduciary”

  1. PatientSaver Says:
    November 3rd, 2015 at 11:38 pm 1446593919
    1446593919

    From the CFP Board website:

    Rule 1.4 establishes the standard of care required by CFP® professionals. The rule establishes a baseline standard that requires that all CFP® professionals place the interest of the client ahead of their own at all times. When providing financial planning or material elements of financial planning, the CFP® professional’s duty of care rises to that of a fiduciary, as defined by CFP Board.

  2. donald_s Says:
    November 6th, 2015 at 04:08 am 1446782887
    1446782887

    Thanks Patient. The problem is, the CFP is a standard for a professional organization, not a legal standing. The CFP board does not do surprise audits, cannot hit you with massive fines, and cannot put you out of business. All they can do is take away your right to put "CFP" after your name. Now that is not to disparage the CFP standard. Many CFP are also RIAs or CPAs. And the ones that aren't are by and large well trained and very ethical. But the only way that an unethical CFP is going to be caught is if someone turns them in. It won't be through an independent audit. This also applies to the rest of the alphabet soup of financial certifications, including CFAs, CLUs, etc, etc.

    The only people who have a legal obligation to put your interest first are the fiduciaries I listed in my 'tip'.

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