First Is Your Advisor a Fiduciary?

Many investors assume their financial advisors always put their customers’ interests first, continuing years of misperceptions over which professionals are actually held to the fiduciary standard.

Almost half of Americans surveyed incorrectly believe all financial advisors are required by law to act as fiduciaries, according to the most recent Financial Trust Report from Personal Capital. The study also found that 65 percent of investors already working with a financial advisor mistakenly believed advisors can only make recommendations that are in the client’s best interest. However, different types of financial professionals are held to different standards of market conduct.

The easiest way to tell the difference between a fiduciary, a broker, and a dual registered advisor is to simply ask the person which role they fill, according to Ed Bamberg, AIF^®, CFP^®, managing partner and financial advisor at Integrity Advisors, LLC in Vero Beach, Florida. Financial professionals are required to disclose whether they charge commissions on their products, he added, which indicates whether they are required to act as a fiduciary.

Bamberg said the simplest definition of a fiduciary is someone who puts their clients’ needs ahead of their own. Fiduciaries also have an obligation to explain to clients their products – inside and out – in the simplest terms possible.

“As financial professionals, we know a lot about our industry and we understand the terminology,” Bamberg said. “However, many end up confusing clients when all they are trying to do is educate them. Most clients want to know what time it is, but they are being told how the watch works.”

When a prospective client meets an advisor for the first time, Bamberg said, asking whether they are a fiduciary is one of the three most important questions to ask. The second is how they would protect your portfolio during a stock or bond market collapse. Thirdly, prospects should ask what surrender charges and time commitments are associated with their products.

“Many clients get into something because it sounds good,” Bamberg said, “but then they realize that (because of the surrender charges and time commitments) they don’t have a chance to get out for many years. Granted, it is all spelled out in the prospectus. But as we know, most clients don’t read the prospectus and they rely on advisors to inform them. Some advisors are not going to volunteer that information. The client needs to ask up front what they would have to pay in surrender charges.”

“The financial industry as a whole would be better served by simplifying its disclosures and prospectuses,” he continued. One suggested approach is highlighting and summarizing key features with bullet points. “If you want people to actually read the documents, have a summary of bullet points that tell the clients what page contains more details about the topics,” Bamberg said. “Bullet points about the most important points in the prospectus need to be right there in the front where the client can see them. It doesn’t have to be that hard.” Bamberg started out in the life insurance business in 1996, and soon realized he wanted to offer more comprehensive planning and services to his clients. To do that, he earned his Certified Financial Planner^® (CFP^®) certification in 1999. Today, Integrity Advisors works almost exclusively with clients from a large Florida-based corporation providing retirement planning, retirement account rollovers, and investment management services. Most of those clients are fee-based, and the firm retains approximately 98 percent of them.

“From a planning standpoint, most of our clients’ assets are the same type because most of them are from the same company. However, their level of assets and their retirement income needs are different, so we customize our retirement planning process for each of them.”

Bamberg said he follows the advice of a former colleague who said each client should know what they own and why they own it. He said too many clients have little or no idea what is in their portfolio and why those investments were recommended. Integrity Advisors tries to help its clients understand those details of their managed portfolios.

The recent pandemic created some interesting results for the firm. “When the governor of Florida issued the stay-at-home order in April 2020,” Bamberg said, “I decided to further my education. I earned my Accredited Investment Fiduciary (AIF^®) designation, which has become a prominent accreditation in our industry and is a great compliment to my CFP^®.” In addition, despite a turbulent 2020, Integrity’s revenues increased during its first full year as an independent firm. Goals for 2021 include additional client acquisitions and revenue growth. Due to an increase in early retirees, as well as referrals, the firm has achieved most of their 2021 goals as of this April interview.

For more information on Integrity Advisors, visit integrityadvs.com

These are the opinions of Ed Bamberg and not necessarily those of Cambridge Investment Research.
They are for informational purposes only and should not be construed or acted upon as individual investment advice.