Dangerous Money Word “F & C”

Truth on this money “F” word and “C” word is a must and why it matters! Even more so when looking for a financial advisor or financial planner. I am here to shed light out of love to help protect you from misleading information and help provide financial literacy.

The word “Fiduciary” is used almost everywhere it seems these days by all sorts of insurance agents, annuity agents, advisors, brokerage firms, banks, financial advisors, financial planners, and so much more. The sad reality is often it is very misleading and not fully true. We will also explore what the “C” word of “Captive vs Non-Captive” means.

I recently went in December 2023 to a Tax & Legal Conference and another Tax Summit in January 2024, where they said roughly only 7%-10% of all advisors are true Fiduciaries. They said at both conferences a person needs to be fully aware of the “F” and “C” words before deciding who to work with or hire. Let’s explore the facts first and shed light on what actually occurs or I have seen myself.

What is a Fiduciary Advisor? (1)

The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to act in their clients’ best interest. This fiduciary duty is regulated by the SEC and is characterized by two key applications (summarized):

Duty of care. The investment advisor must, among other things, understand clients’ financial objectives and circumstances, and apply skill, diligence and prudence in support of their needs and objectives.
Loyalty. The investment advisor must avoid any conflicts of interest and always prioritize clients’ best interests.

How do I know? (1)

How can someone verify whether a financial professional is indeed a fiduciary advisor? One way is to simply ask the financial professional. Another method is to check the SEC website or look into the financial professional’s credentials; a certified financial planner (CFP) professional, for example, is obligated to act as a fiduciary advisor.

All investment advisors registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator must act as fiduciaries. On the other hand, broker-dealers, stockbrokers and insurance agents are only required to fulfill a suitability obligation. This means that while they must provide suitable recommendations to their clients, they don’t have to put their client’s interests before their own. (5)

Only fiduciary financial advisors are required to place your best interest above theirs. Fiduciary financial advisors typically work for Registered Investment Advisors (RIAs). They can also be certified financial planners (CFPs), but you should always double-check before working with one. (4)

The financial advisors who work for brokerage firms aren’t typically fiduciaries. These professionals instead are required to work under the legal bounds of the suitability standard. Under this standard, these advisors are required to give advice and product recommendations that are only suitable for you, meaning they may have high fees or offer the advisor a large commission.

What is an RIA? (2)

An RIA is a Registered Investment Advisor. They are legal fiduciaries, but broker-dealers and other types of money managers are not. Some financial advisors, such as certified financial planners, may also be fiduciaries.

If your financial advisor doesn’t have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission than ones that would be the best fit for you, which could cost you more. Fiduciaries, on the other hand, must act in your best interest. That’s why it’s considered better to work with a fiduciary rather than an advisor who is simply following the suitability standard.

What is Captive vs Non-Captive?

A captive agent or advisor is only allowed to sell or use certain products or investments. Usually, agents or advisors work for a brokerage firm, a bank, or an insurance company. They are not able to sell or use products from other companies and/or are very limited to what if any other products they may use from another company.

A non-captive agent or advisor is someone who could sell or use products or investments from a large array of other companies. They are not limited to what they can or cannot use as they are not tied to just one company or limited in nature.

Are they all bad?

No, I think there are people who are not true Fiduciaries working at places like brokerage firms or are captive at an insurance company. They might even have some good services and/or products as well. Also, it does not mean that brokerage firms, insurance companies or others are bad. However, it is important for you as the consumer and client to be fully aware of the type of person or business, and to know what they can and cannot do.

What choices do you have?

Ultimately, it is to provide you truths and awareness so that you can make the best choice for yourself. It is your money and your life, so be aware of the truths and choose what is best for you. I myself used to work at a Brokerage firm and a hybrid insurance company. However, I left all of that for so many reasons to become a true Fiduciary part of an RIA myself.

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