Financial advice that starts with a plan.
We help you do more with what you’ve earned.
If you want someone handling your finances who actually has your best interests in mind, then you should work with a fiduciary financial advisor. The problem is that there is so much confusion and misinformation about financial industry professionals.
What is the difference between a financial advisor, a financial consultant, and a wealth manager? What about a financial planner, a registered representative, and an investment advisor representative?
Do these titles really mean anything? Do they help to separate the pretenders from the contenders? The grifters from the real advisors?
No, not really.
These titles do nothing more than to self-designate supposed capabilities. The most well-known designation, CFP©️ (Certified Financial Planner), offers some comfort to those exploring their options.
But what about those with the C3DWP (3-Dimensional Wealth Practitioner) designation? Financial Paraplanner Qualified Professional (FPQP)? Or the Global Financial Steward (GFS)? Some of these designations are getting a bit ridiculous.
It is easy to understand why there are so many designations. There are a lot of “financial advisors” in the U.S., 713,576 to be precise (FINRA, 2024). A lot of advisors are struggling to stand apart from the pack.
As such, it is important to know that the vast majority of financial advisors are not required to place your interests before their own. So, how do we know which advisors are here to help and which are here to sell a product? Keep reading to learn more about what to look for when you begin researching for a financial advisor who will be the best fit for you.
Types of Financial Advisors: Why You Should Work with a Fiduciary Advisor
There are three (3) types of financial advisors out there:
- Brokers
- Fiduciary Advisors (Fee-Based)
- Dual-Registered Advisors
They are all different, and most have different incentives. All investors need to know these differences.
Brokers
A broker is a financial advisor who works for a broker/dealer, an insurance firm, or both. They are paid a commission or a fee for selling products to their clients. Most of the financial household names are broker/dealer firms, including Merrill Lynch, Edward Jones, Morgan Stanley, Ameriprise, etc. 88% of all financial advisors in the U.S. are brokers. It is disturbing that brokers don’t have to recommend the best product for their clients. They only have to provide a suitable product to their clients, not what they think is best. By law, brokers only have to adhere to the suitability requirement, which is a very low bar to clear.
To be clear, I’m not suggesting that all broker/dealer financial advisors are Jordan Belfort’s or Gordon Gekko’s in hiding. In fact, most financial advisors working at these firms are decent people. I worked at some of the largest and most well-known broker/dealers globally, and I can tell you from experience that most financial advisors aim to do well for their clients. However, brokers have a significant conflict of interest: they get paid by selling financial products to their clients.
It is one thing to trust somebody, and it is another to trust their incentives. History proves that it is wiser to follow the latter. A broker’s motive is to sell high-paying products to their clients. They will earn more by recommending certain products over others. If a broker had to choose between an actively managed mutual fund with high fees and a passively managed ETF with low fees, they would almost always choose the higher fee option.
Fiduciary Financial Advisors
Of the 713,576 financial advisors in the U.S., 404,781 (56%) work for a Registered Investment Advisor (RIA) firm, but not all are fiduciary advisors. However, not all of these advisors are fiduciaries. Confusing, I know.
So, how many fiduciary financial advisors are there in the U.S.? 85,184, or 12% of all financial advisors, are true fiduciaries.
This is the case because Independent Advisors (12%) and Dually Registered Advisors (44.7%) both operate under an RIA firm. There is a significant distinction between the two, which I will address in the next section.
Securities Industry Registered Individuals by Type of Registration, 2024
| Total Number of Individuals | |
|---|---|
| Broker-Dealer Only | 308,795 |
| Dual Broker-Dealer / Investment Advisor | 319,597 |
| All Broker/Dealer Individuals | 628,392 |
| Investment Advisor Only (Fiduciaries) | 85,184 |
| Total Registered Individuals | 713,576 |
“In translating fiduciary principles into application, an RIA is required to implement certain practices and procedures to ensure conformance to the law. At the heart of conformance is the registration form (ADV Parts I and II) that financial advisors must file with the SEC. It is ADV Part II; in which the advisor must disclose all material information a client needs to make an informed decision about the advisory relationship or a specific transaction.”
(Investopedia)
The information and disclosures required include:
- All material facts of any instance in which a conflict of interest may exist; past, present, or future
- Any type of arrangement or relationship the advisor has that could present a conflict of interest, including participation or an interest in any client transaction
- All material risks involved with methods of analysis used in determining suitability
- Any unusual risk involved in a specific investment strategy or security
This detailed information must then be compiled into a client brochure and written in clear language in a specified format so investors may compare one firm to another on an apples-to-apples basis.
Do more with what you’ve earned.
You’ve worked hard to get here. We build financial plans around your actual life so you can make the most of it.
How Do Fiduciary Advisors Get Paid?
Since fiduciary advisors are required to keep their clients’ interests in mind, it is extremely important to understand their incentives. In short, fiduciary advisors can only ‘get paid’ by their clients in a handful of ways:
- Assets Under Management
- Hourly
- Fixed Fee
- One-Time Fees
I break down how fiduciary advisors get paid in greater detail here.
Dual-Registered Advisors
If you were to choose between a broker and an RIA advisor, the choice is pretty clear, right? Perhaps not. Now, here is a relatively well-kept secret within the industry. Most of the independent fiduciary financial advisors in the industry are not fiduciaries 100% of the time. These advisors are Dual Registered Advisors. Dual-registered advisors are financial advisors registered as brokers (under a broker/dealer) AND as RIAs.
So, what does this mean? This means that they can claim to be a fiduciary independent advisor on one hand and sell products for a commission as a broker on the other. It’s a shady business. These types of advisors are wolves in sheep’s clothing. These advisors can earn a client’s trust by telling them they are fiduciaries and obligated to place their interests before their own. Then, they can switch hats and sell financial products for a commission. And, unfortunately, the vast majority of independent advisors are structured this way.
Are CFP©️ Advisors Fiduciaries All The Time?
No, most CFPs (Certified Financial Planners) are not always fiduciaries. In fact, the vast majority of CFPs are brokers collecting commissions. In my opinion, if a CFP collects a commission, they have a significant conflict of interest, and they should not be considered a true fiduciary.
Keep in mind that the CFP designation is beholden only to itself. The CFP Board is a self-regulating organization whose members do not face any legal ramifications if an individual breaches the fiduciary veil. Instead, if a member does not uphold the CFP©️ code of conduct, they only risk losing their CFP©️ credential and membership.
True Independent Fiduciary Advisors
Of the 393,294 Registered Investment Advisors (RIA) in the U.S., 312,317 of them are Dual-Registered Advisors. This means that only 85,184 RIAs are true fiduciary investment advisors without this huge conflict of interest. This represents only 12% of the 713,576 financial advisors in the U.S.
So, how do you tell whether a financial advisor is a fiduciary advisor, a broker, or both? It’s simple:
- Head to brokercheck.com.
- Search for a particular financial advisor.
- Check whether this individual is an investment advisor, a broker, or both.
Ensuring that your financial advisor is a fiduciary advisor is perhaps the most critical step when evaluating who you want to work with. However, it is not the only question you should be asking.
After deliberating back and forth, we outlined the 10 best questions one should ask a financial advisor before hiring them.
We know that finding the perfect financial advisor can be intimidating. After all, you will be entrusting your net worth to this person, so you want to make sure that this person is not only competent but also ethical.
Please feel free to download our free resource below. As always, feel free to contact us with any questions.
