The Informed Investor
Why Request a Fiduciary Oath?
Getting a commitment in writing demonstrates the gravity of an agreement or situation. When you get married, you sign a marriage license. When you buy a house, you sign a purchase agreement. When you download a new version of a Mac operating system, you agree to the written terms and conditions. Written agreements are commonplace, so it would be straightforward to ask your financial advisor, or potential financial advisor, to sign a written statement of fiduciary responsibilities―also known as a fiduciary oath.
A fiduciary oath is a statement signed by a fiduciary that outlines the fiduciary’s duties and responsibilities in writing. Groups such as The Committee for the Fiduciary Standard, founded in 2009 after several infamous financial crises, have emphasized the importance of signing an oath to clarify the relationship between the fiduciary advisor and the client. This document can help clients determine if a financial advisor is acting as a fiduciary.
Why Seek a Fiduciary?
A professional fiduciary is held to a higher standard of customer care than a broker, insurance salesperson, or bank representative. Fiduciaries are legally obligated to put their client’s best interests first and adhere to a fiduciary standard of care. Brokers or other product salespeople are only held to a “suitability” standard. The suitability standard does not prevent profit-seeking activities, and invisible costs can pile up. Retirement plan expert Scott Simon eloquently explains in his article, "Why I’m a Fiduciary."[1]
Brokers, bankers, and other professionals who deal with product sales can call themselves whatever they wish, confusing the public. They may use titles like wealth manager, financial advisor, money manager, or something similar. Titles generally are not regulated.
Matters are further complicated because some brokers are dually registered as investment advisors, meaning they have a fiduciary duty when acting as investment advisors. However, that duty is invalidated when the same person acts as a broker. Investors should wonder who is sitting across from them on any given day—the broker or the investment advisor?
Ideally, anyone who provides personalized financial and investment advice should be held to a fiduciary standard. Unfortunately, that is not currently the case, so investors must exercise an abundance of caution when seeking the services of a financial advisor. That’s where a fiduciary oath comes into play.
Ask for a Fiduciary Oath in Writing
Searching for a professional fiduciary with the proper training and commitment to upholding a fiduciary standard of care is a prudent move for investors. Fiduciaries, brokers, and professionals with dual registration have different regulations, which can be confusing. Without clarification in the financial advising arena, it can be challenging to know if you're really working with a fiduciary or if you're working with someone who claims to be a fiduciary.
It’s wise for investors to ask financial advisors to document the meaning of fiduciary. Documentation will help separate the wheat from the chaff. What does the term “fiduciary” really mean in practice? What are the fiduciary advisor’s obligations to the client? These fiduciary responsibilities can be defined through a fiduciary oath.
Kate McBride, fiduciary consultant, founder and president of FiduciaryPath, LLCTM, says that obtaining a written statement of fiduciary responsibilities is a best practice which drives accountability. “If it’s in writing, it is likely that it will happen,” McBride says, “and if it doesn’t, you can and should find out why. Don’t be shy. That’s also why it should be in writing—it sets expectations for both the professional fiduciary and the client."[2]
In addition to setting clear expectations, a fiduciary oath can also offer the client a certain amount of protection. If the financial advisor outlines their fiduciary duties in writing and then blatantly disregards those duties, the client has clear evidence of wrongdoing, which can hopefully be used to help rectify the situation.
If a financial advisor will not sign a fiduciary oath, the investor should find out why. The advisor may have a legitimate reason. Perhaps they have their own fiduciary oath, but it’s probable they are either not a fiduciary or their company does not allow them to sign such a document.
If I had to guess, about 90 percent of financial advisors would run away when presented with a fiduciary oath. These are the brokers, insurance agents, bankers, and other financial advisors whose loyalty may be torn between their own company and the investor’s interests. These are not true fiduciaries, and signing a fiduciary oath could bring about severe consequences for them from their employers.
What Should a Fiduciary Oath Contain?
The five core principles outlined by The Committee for the Fiduciary Standard are straightforward, easily adaptable, and not difficult for any true fiduciary advisor to uphold. The Committee’s fiduciary oath reads as follows:
- I will always put your best interests first.
- I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
- I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
- I will avoid conflicts of interest.
- I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
The financial advisory field can be full of dense language and terminology, but this fiduciary oath is simple and approachable. The average investor can look it over and instantly understand the agreement. While the Committee’s version of the oath provides an excellent example, it’s certainly not the only one in existence.
The fiduciary oath by the National Association of Personal Financial Advisors (NAPFA) is also brief, straightforward, and well-written:
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor. The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client's business.
Following the NAPFA Fiduciary Oath means I shall:
- Always act in good faith and with candor.
- Be proactive in disclosing any conflicts of interest that may impact a client.
- Not accept any referral fees or compensation contingent upon the purchase or sale of a financial product.
Though these oaths are a bit different, their core tenets are the same. Both articulate a commitment to act in the client’s best interests, disclose any conflicts of interest, and practice integrity.
How to Find a True Fiduciary?
1. Research your advisor’s background
Before asking a financial advisor to sign a fiduciary oath, it is wise to do a little digging. Comb through the advisor’s (or their company’s) website to look at their credentials and see if they are a registered investment advisor. This doesn’t necessarily guarantee the financial advisor will act as a fiduciary, but it’s a good first step. You can also search through NAPFA’s database to find fee-only financial advisors who have been vetted by NAPFA and adhere to their code of ethics.
2. Pay attention to the company’s language
Search through the website and any literature a financial advisory firm gives you and look for language related to fiduciary duties. Does it appear at all? Is there a fiduciary oath on the company’s website? If you’re having trouble finding language about fiduciary responsibilities ―which may be articulated as “putting the clients’ best interests first” ― that could be a warning sign.
3. Ask about a fiduciary oath
When asking about a fiduciary oath, being direct with your questioning is a good idea. You can ask about this over the phone before interviewing a financial advisor or during an interview. Consider bringing a copy of the Committee for the Fiduciary Standard's oath to your interview meeting and asking the financial advisor to sign it. If they won't sign it, ask why. They may have their own version, but it may be more likely they are not a true fiduciary.
As with all critical obligations and agreements, obtaining a written statement of fiduciary responsibilities is imperative before agreeing to work with a financial advisor. If the person you’re interviewing is a true fiduciary, they will not be offended if you ask them to sign a fiduciary oath. They may even be pleased that you value a fiduciary’s efforts to place the client’s interests first.
References
- Simon, W. Scott, (October 3, 2013). Why I’m a Fiduciary. Fiduciary Experts, Morningstar. https://fiduciary-experts.com/why-im-a-fiduciary-2/
- Kate McBride is an Accredited Investment Fiduciary Analyst®, and a CEFEX Analyst, with more than 40 years of investment industry experience. She is the Founder and President of FiduciaryPath and the former chair of The Committee for the Fiduciary Standard. She is an AIFA® Designee, Fiduciary Education Trainer, CEFEX Analyst, and Fiduciary Consultant.
Learn more about David Bromelkamp
Hello! I’m Dave, the founder and chief executive officer of Allodium Investment Consultants, located in Minneapolis, MN. I am also the author of AdvisorSmart for the Individual Investor: Your Guide to Selecting a Financial Advisor to Get Better Financial Advice. I am dedicated to educating individual and institutional investors about financial planning and investing. When I’m not helping people make investment decisions, I enjoy traveling, hiking and spending time with my wife and family.
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