Advisers Who Call Themselves Fiduciaries May Not Live Up to It

By 

JASON ZWEIG

Even if the government stops pushing retirement advisers to act in your best interest, many have already decided to do so — or convince you that they are.

On Feb. 3, the White House ordered the Labor Department to review its rule on fiduciary duty, which would require brokers getting paid to provide investment advice on a retirement account to act solely in the best interest of the client. Five days later, a federal judge in Texas rejected a legal challenge to the Labor Department’s rule.

Regardless of what judges or regulators decide, the word “fiduciary” is already becoming a promotional bonanza for brokers and financial advisers. As an investor, you have to be more vigilant — not less — now that just about everybody in the financial industry is scampering to say “I’m a fiduciary.”

Calling oneself a fiduciary is easier than living up to the standard.

A fiduciary — rooted in the Latin words “fides” (faith) and “fiducia” (trust) — is someone who must put your interests ahead of his or her own. That means acting prudently, revealing all relevant information, eliminating as many conflicts of interest as possible and disclosing any conflicts that remain.

Registered investment advisers must function as fiduciaries. Stockbrokers, insurance agents and other sellers of securities generally haven’t had to. A broker could sell you his own firm’s mutual fund, for instance, without belaboring the fact that it would cost you a boatload more than an index fund from Vanguard Group. Or an insurance agent could flog an annuity without mentioning that if she sold three more of them that month, she would get a free trip to Maui.

A close look at the business approach of some registered investment advisers — who register with the government and who must be fiduciaries — even suggest a strained interpretation of the term.

The Labor Department’s new rule is scheduled to take effect in April, although numerous private lawsuits and the Trump administration’s own directive might derail it. But calling yourself a fiduciary is already hot.

The Financial Industry Regulatory Authority, which tracks financial designations, already lists four that include the word “fiduciary.” Such titles, which often are industry-created and which many financial advisers use to impress clients, have a way of proliferating in response to the latest marketing buzzwords.

The home page on the website for one such designation, the Registered Fiduciary, features two bullet-points telling advisers that earning the credential will assure them of “profit-based pricing: making every client a profit center” and “no restrictions on forms of compensation used.”

Louis Harvey, chief executive of Dalbar, the Boston-based financial-research firm that created the Registered Fiduciary designation, says the training for the program encourages advisers to look at clients “in terms of what services you provide relative to your costs, rather than in terms of how much money they have.” Advisers, he says, learn that even small clients can be profitable when the business is seen in that light.

Mr. Harvey says about 500 advisers have earned the credential, which requires a background check, specialized expertise and “a minimum of about five years” of relevant experience. The final hurdle is a passing grade of at least 70 on a proctored online test.

Meanwhile, many financial planners are describing themselves as “fiduciary wealth managers,” often capitalizing each word as if it were a professional certification, even though it isn’t — at least not yet.

I recently looked up dozens of Form ADVs, a disclosure filed by registered investment advisers, on the Securities and Exchange Commission’s website. Again and again, advisers disclosed that they spend 10% to 20% of their working hours selling insurance and that the resulting commissions are a conflict of interest.

Nevertheless, they argued, that conflict was minimal. Why? Because they are fiduciaries, advisers argue, they won’t sell you that insurance — no matter how high the commissions they might earn on it — unless it is in your best interest.

Maybe so. But brokers and insurance agents are only human. An 8% commission might well make them feel that annuity is in your best interest, too — especially when compared against other choices paying low or no commission.

And clients — like you and me — are only human, too. When your trusted financial adviser or insurance agent says, “I’m a fiduciary,” some of your skepticism will melt away.

Psychologists have documented what they call “moral licensing,” or the tendency of advisers to feel they have a freer hand once they disclose a conflict. And once you hear, “I earn a commission on this, but I’m recommending it only because it is in your best interest,” you’ll get a warm glow, the research suggests.

So the best time to be skeptical and understand your adviser’s obligations (see this related story) is when you’re hiring the person in the first place, before that bond of trust has fused you together.

Ask whether the adviser gets compensated by anyone but you, and why. Request a written commitment to act as a fiduciary. Ask him to tell you about three conflicts of interest that might arise; if he tells you he doesn’t have any, put your hand on your wallet and leave immediately. Whether he’s called a fiduciary or not, that’s someone who’s either fooling himself or trying to fool you.

Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on Twitter at @jasonzweigwsj.