Understanding the Difference Between Full-Time and Part-Time Fiduciaries in Financial Advice
When I wrote this article for Barron's in 2010, the word “fiduciary” was not nearly as widespread as it is today. Often, when contacted by a prospective client, the first question they ask is, “Are you a fiduciary?” Although this is excellent progress, the following question is equally important and one that many financial advisors may prefer to avoid, “Are you a ‘full-time’ fiduciary?” Why? Because many financial advisors are not. Instead, they are only “part-time” fiduciaries.
These so-called “hybrid” advisors are dully licensed as brokers. So long as they are operating in your fee-based account, they are certainly acting in a fiduciary capacity. However, the fiduciary protections do not extend to product sales. If clients understand this and do not have a problem with sales-driven advice, no problem. But how many truly understand the situation? Ostensibly, they are attempting to avoid sales-driven advice, or they would not have been attracted to a fee-based account in the first place. Moreover, hybrid advisors typically refer to themselves as fee-based advisors. This can give the impression that their sole source of compensation is the fees they charge to maintain a fee-based account.
Fee-based sounds an awful lot like “fee-only,” doesn't it? A fee-only advisor is in fact a full-time fiduciary. Fee-only advisors, as the name implies, do not sell products or earn commissions. Commission-based products are typically burdened by onerous recurring fees needed in no small part to pay the commissions—commissions of 7% or more for products, such as annuities. Was the product really that unique? That special? So special that there were no similar products available without the onerous commission and attendant elevated operating expenses?
Again, such products are laden with hidden fees. You will never receive an invoice because they are collected at the fund level—directly from shareholder assets—so that you never see an invoice. Your return is simply lower than it otherwise would be if you were invested in vehicles with lower fees. And if you have ever been told that “the issuer pays the commission,” think again. The ongoing hidden fees you pay are how they recoup the commission outlay. So, who really pays the commission? You. In addition to the fees you pay to maintain a fee-based account.
I have no problem with the hybrid compensation model perse. The issue is transparency. “Fee-based” implies that fees are the sole form of compensation, fewer potential conflicts of interest, etc. No doubt the legalese found in the account paperwork provided the required disclosure. However, investors seeking a fiduciary advisor to operate a fee-based account may fail to grasp the language stating that their advisor also receives commissions for selling products and that the fiduciary protection they sought in the first place does not apply to product sales. This is akin to a car dealership servicing a vehicle under warranty protection, whereby the dealer sources certain parts to boost profits, parts that happen to increase vehicle operating costs.
Hybrid advisors are not held to the fiduciary standard for product sales. Investors should know the difference and understand the implications of sales-driven advice. A good place to look for a fee-only advisor is the National Association of Personal Financial Advisors (NAPFA). Learn more at NAPFA.org.
In full disclosure, I am a fee-only advisor and have been a NAPFA member since 2008.
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