4/8/14 5:42 PM Why is Your Investment Advisor Unwilling to be Named a Fiduciary?

First of all, what the heck is a fiduciary? A fiduciary is a person in a special position of trust on whom others rely. This person must always act solely in the best interest of the person relying on him and is expected to act prudently, in accordance with what a person familiar with such matters would do.

That’s a high standard, much higher than just “knowing your client” and recommending “suitable” investments, the standard to which stockbrokers are currently held. As such, being a fiduciary entails extra liabiity. That’s why, with some exceptions, most brokerage and insurance firms, including brokerage firms owned by banks, will not allow their advisors to name themselves a fiduciary in writing.

This is especially a big deal in advising or managing retirement plans, but it also makes a difference in terms of managing your personal investments. You want someone acting in accordance with the highest ethical standards, especially in the investment business.

I worked for two of the best-known brokerage firms on Wall St., and for the nine years I was in that business and I have often said that if clients could be the proverbial fly on the wall at their broker’s lunch breaks many of them would be shocked and dismayed, if not outright frightened.

I left that industry at the end of 1994 because I felt that no matter how ethical I was, the system was built to reward transactions, not management and built to reward those who were willing to push higher commission products when other products would have served as well or better. I got tired of seeing brokers manage the same amount of money I did but earn 2-3 times the income because they were willing to act as the system was built to reward, not in the clients’ best interests.

Since then I have been an exclusively fee-only registered investment advisor (RIA), not paid a dime for transactions. When I started to learn more about fiduciaries I was all ears and that has become the focus of my practice. I am now an accredited investment fiduciary (AIF).

So, I voluntarily list myself as a fiduciary on the accounts I manage, especially the retirement plans, which is by far the most rapidly growing part of my business and my main focus.

BTW, as Ary Rosenbaum, a prominent ERISA attorney has written, don’t fall for the term “co-fiduciary.” There is no part-way with being a fiduciary. While a fiduciary that works for a company sponsoring the retirement plan can never fully pass on that liability and responsibility because he must properly appoint and monitor anyway he hires to work on the plan, an advisor should name himself in writing as a fiduciary and accept the liability and responsibility I mentioned at the top.

So, whether you are a plan sponsor or an individual working with an advisor, ask yourself which is the best relationship – nonfiduciary or fiduciary? Transaction-oriented compensation or fee-only? The answer should be pretty clear.