On behalf of Mihalek Law posted in Securities Law on Friday, December 19, 2014.
Most individuals who have a considerable amount of wealth do not manage it on their own. Instead, they hire a financial advisor to help it grow. Because this is such a great responsibility it is important to have someone in this role who is trustworthy and can be counted on to look out for your best interests. Depending on the responsibilities of the person, it is possible that they may not always be expected to act as a fiduciary.
For example, a broker will be expected to provide recommendations that are suitable in light of what that individual knows about the investor. There is nothing that says that the recommended products have to be in the best financial interest of the investor however. In fact, the broker will make a commission on what is sold.
Similarly, a financial planner who is also a broker does not have to always put the interest of the investor ahead of his or her own interests. Here again, this is because of the lack of a fiduciary relationship.
For the best chance of establishing a fiduciary, it is best to work with a firm that is a registered investment advisor. The employees of these firms—called Investment Advisor Representatives, must always work in the best interest of the investor and are held to the highest ethical standard.
Things can become complicated when a financial advisor’s position is a hybrid.
Determining who is a fiduciary may also be determined based upon how the individual is paid. If the payment is commission-based, the broker-dealer is also a sales representative. In fee-based situations it is a hybrid situation. A registered investment advisor will be paid in a fee-only manner.
Regardless of the type of financial advisor you are working with, it is important that the advisor work within the parameters established for his or her role. Venturing outside of them could result in the investor taking legal action.
Source: Forbes, “The Most Important Question To Ask Your Financial Advisor,” Laura Shin, Dec. 18, 2014