Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His book, “The Behavior Gap,” was published earlier this year. His sketches are archived here on the Bucks blog.

For years, I’ve encouraged people looking for help managing their money to ask questions, lots of questions. One of the best questions you can ask is, “Do you act as a fiduciary?”

A fiduci-what?

Even though it’s a topic that’s gotten more coverage in recent years, you’re not alone if you haven’t heard the term as it relates to financial advisers.

So what does it mean to act as a fiduciary?

In simple terms, it means that your customers’ interests come first. The client and advice to the client are at the center of a fiduciary relationship. Not the advisers. Not the firms. The clients.

More specifically, an adviser, financial planner or broker who claims to act as a fiduciary is held to standards outlined in the 1940 Investment Advisors Act. Besides acting in your best interest they must:

Owe you undivided loyalty and act in good faith

Avoid engaging in activity that’s a conflict of interest, and, at the very least, disclose any potential conflict

Provide a full disclosure of any advice they offer

If you’re still wondering what that means to you, HighTower Advisors, an adviser-owned company, came up with an easy way to think of what acting as a fiduciary means:

… you wouldn’t expect your butcher to give objective dietary advice … If you want advice about what to eat, you go to a dietician, and by analogy when you want financial advice, you go to a fiduciary.

We all understand the difference between an adviser and a salesperson. We would never expect a Toyota salesperson to send us to the Honda dealership if a Honda were better for our family. We know when we walk into the dealership that they are going to try to sell us a Toyota, and we’re prepared to protect our own interests.

But things get confusing when we have salespeople calling themselves advisers. I know of no other industry where it’s harder to figure out who does what. Everyone in the traditional financial services industry calls themselves an adviser, so you would think that means they are giving you advice that will be in your best interest. And sometimes they are.

Other times, things aren’t so clear. We have all heard plenty about advisers who clearly put themselves and the firm they work for ahead of the clients. To make matters more confusing, there are some advisers who aren’t legally able to call themselves a fiduciary but still act like one. Despite working in an environment that might reward someone for selling garbage to unsuspecting clients, they manage to fight the good fight and put their clients first.

On the flipside, there are some advisers who are regulated as fiduciaries that may put their interests ahead of the clients.

There is a debate in the industry about how to solve this problem, but don’t hold your breath. Instead, start by asking yourself if the adviser you’re considering or work with acts like a fiduciary.

Do they put your interests ahead of their own and the firm they work for?

Does the firm they work for have a culture of putting the client’s interests first?

Do they work hard to make sure you know how they are paid and to disclose any conflicts of interest?

If you have any doubts, have a very candid conversation. Ask them. Remember, this is not a foolproof way to find someone you can trust, but it is these kind of conversations that will put you in a better place to carefully evaluate the nature of your relationship and act accordingly.