Do Fiduciary Financial Advisors Produce Better Results?
When it comes to finding the best financial advisor, I always recommend choosing a fiduciary financial advisor. But do fiduciary financial advisors really produce better results?
To answer this question, let’s first separate the words “fiduciary” and “financial advisor.”
A fiduciary is a person who holds a position of trust. Financial advisor is supposed describe a particular type of professional, but this title is frequently manipulated. When you combine the words fiduciary financial advisor, you are describing a unique financial professional who provides advice and ongoing services for fees.
Fiduciary Financial Advisor
A fiduciary financial advisor holds a particular type of registration – Registered Investment Advisor (firm) or Investment Advisor Representative (professional) – that allows them to be compensated with fees for their advice and ongoing services.
Professionals who hold these types of registrations are the real financial advisors.
Non-Fiduciary Financial Advisor
If advisors are not Investment Advisor Representatives, then they are not fiduciaries. They are sales representatives who have securities licenses that permit them to sell investment products for commission. This type of professional is not allowed to charge fees for their knowledge, recommendations or services. Commissions are their only form of compensation.
Types of Advice
As you may already know, Wall Street has the most powerful sales culture in the country and it is a marketing machine. It employs or licenses more than 650,000 advisors and representatives who sell its products and services. And that is not counting the additional hundreds of thousands who sell insurance products.
Why is this important? The registrations of fiduciary financial advisors permit them to provide financial advice and ongoing services for fees. The licenses of non-fiduciary financial advisors do not allow them to provide ongoing services and charge fees for their knowledge, advice and services, because they are essentially selling something.
In fact, they are not allowed to provide advice. Their licenses limit them to making sales recommendations when they sell investment products.
This opens the door for some Wall Street trickery. Fiduciary advisors provide financial “advice” for fees. Non-fiduciary advisors make sales “recommendations” for commissions. Wall Street knows that very few people know the key differences between “advice” and “recommendations.” However, the differences between these two words is what enables advisors and salespeople to control or influence your investment decisions.
The Name Game
There is another game you should be aware of. Anyone can claim to be a financial advisor, whether it is true or not. Why play the name game? Sales types know that a high percentage of people do not want salespeople investing their assets. So their solution was to change their title to Financial Advisor, Financial Planner, Investment Advisor, etc.
This deception works because most people do not know the critical differences between real fiduciary financial advisors and sales professionals.
Financial Advisor Ethics
A fiduciary financial advisor is held to the highest ethical standard in the financial service industry. Fiduciary advisors are required to put their clients’ financial interests ahead of their own. You could say fiduciary financial advisors are more trustworthy because they are held to higher ethical standards.
On the other hand, the non-fiduciary financial advisor (sales representative) is held to a lower ethical standard that is described as suitability. That is, sales reps are supposed to make suitable recommendations, but they are not required to put their clients’ financial interests ahead of their own.
What About Performance?
As you have no doubt determined, fiduciary is more about ethics than the financial knowledge of advisors. That is, a fiduciary financial advisor may be more trustworthy than a non-fiduciary financial advisor, but not necessarily more competent.
Competence is a function of experience, education and legitimate certifications that have substantial curriculums, proctored examinations and continuing education. Be a little careful with certifications. We believe that at least 35 percent of the 260 certifications and designations that are used by advisors are fake. The sponsors have gone out of business or there are no prerequisites, curriculum or testing. Advisors use fake credentials to look more knowledgeable than they really are.
You can easily check an advisor’s credentials for free by using this Paladin tool.
It takes years of experience for advisors to become real financial experts. Then it takes at least 60 hours per year of study to stay up-to-date.
It is this specialized knowledge that enables fiduciary financial advisors to deliver superior advice and results.
Is There a Connection?
Let’s get back to the original question: Do fiduciary financial advisors produce better results? Is there a connection between the fiduciary status of a financial advisor and the results that are produced by that advisor?
I believe there is. That’s because financial advisors who are serious about their profession and doing what is best for clients are fiduciaries. Taking their profession seriously is what motivates them to commit the extraordinary amount of time it takes to be a real financial expert. And, it is this expertise that enables them to deliver superior financial advice, services and results.
Jack Waymire worked in the financial services industry for 28 years before he left to found the Paladin Registry (www.PaladinRegistry.com) in 2004. This investor education website was based on the Principles in Jack’s first book: “Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor.”
The Registry also has a free service that matches investors to advisors who meet Paladin’s minimum requirements for competence and trustworthiness.
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