Editor’s Note: This is part three in a series on questions to ask your wealth advisor.



“But what if I could ask you only one thing …” — “Questions” by Jack Johnson



Perhaps the most important question an investor should ask when interviewing a potential investment advisor is, “Are you a fiduciary?”  



A fee-only investment advisor serves as a fiduciary, like a physician, CPA or attorney. Such an advisor is compensated by no sources other than his/her client fees, sells no products of any kind, accepts no commissions from any source, and must always act in his clients’ best interests, while providing full transparency and disclosure.



The Latin root of fiduciary is fiducia, which means trust, and can be defined as “one who holds something of value for another person … while serving that person’s best interests.” An investment advisor who serves as a fiduciary to his clients has a legal, moral and ethical obligation to act in the client’s best interests.



Fee-based advisors and stockbrokers are not fiduciaries. Some investors confuse fee-only and fee-based advisors. But sophisticated investors who are interviewing potential advisors are doing so with an increasingly impressive knowledge of the difference between the two.



“Does all your compensation come from your clients’ fees?” is an important corollary to the question, “Are you a fiduciary?” The advisor’s compensation origin is significant, because any employee’s loyalty is most likely tied to the source of his income. A potential conflict of interest exists if an advisor is paid commissions by a parent company for selling annuities, or for selling life insurance, or is paid commissions for investing clients’ assets into a parent company mutual fund.



According to a recent article in the Wall Street Journal, the “CFP (Certified Financial Planner) Board’s Standards of Professional Conduct dictate that the term fee-only can be used (by an investment advisor) only if all the advisor’s compensation … comes from client fees.” Thus, the hybrid model that some investment firms have begun using cannot classify itself as fee-only. 



This hybrid model separates the investment advisory practice into two wings:  one is the fee-only side, where no products are sold and no commissions are accepted, and the other is the fee-based side, where the advisor can accept commissions and can sell products to the client. The creation of this hybrid model has caused considerable confusion for clients, and some concern by the SEC. In response to the creation of this hybrid, the SEC recently and succinctly stated: “This (hybrid) business model presents multiple conflicts ….”  Further, “the SEC separately expressed a rising examination focus on conflicts of interest related to … other compensation arrangements that could be an indirect further conflict for hybrid advisors.”



When a fiduciary advisor faces a conflict of interest, he/she is required to disclose any conflicts that may exist.  A non-fiduciary advisor is not held to the same standard.



Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121 —www.arborwealth.net), a fee-only registered investment advisory firm located near Sandestin.