7 Questions to Ask Your Financial Advisor About the Fiduciary Standard

Advisors, Financial Planning, Investing, Personal Finance, Retirement Planning
7 Questions to Ask Your Financial Advisor About the Fiduciary Standard

By Brad Sherman

Learn more about Brad on NerdWallet’s Ask an Advisor

The Department of Labor recently finalized a rule that requires all retirement advisors to operate under a fiduciary standard, meaning the advisors must act in their clients’ best interests when providing advice. This contrasts with the so-called suitability standard that many commission-based agents and brokers use, which merely requires them to offer “suitable” advice to their clients, not necessarily the best advice.

In light of this new rule, which will go into effect beginning in April 2017, we’ve created a list of top questions to ask your retirement advisor regarding the fiduciary standard.

1. Do you operate with a fiduciary standard?

Retirement advisors who are fiduciaries are required to act in your best interests without prioritizing their own commission or their company’s revenue. This standard is federally regulated and requires advisors to act in good faith and provide a full disclosure of fees, commissions or potential conflicts of interest. Investment advice from a fiduciary won’t be based on pressure to sell particular company products or on a desire to earn a commission. The advice a fiduciary gives will be conflict-free and never directly tied to the retirement advisor’s personal potential to earn.

2. If you are a fiduciary, how long have you operated with a fiduciary standard?

Some advisors may make a switch well before the rule goes into effect, and others will wait until the very last moment. It is important to consider an advisor’s philosophy and mission. You may want to choose one who abides by this standard based on integrity rather than as a requirement or to avoid a negative perception.

3. If you recently changed to operate under the fiduciary standard, why?

If a retirement advisor made a hasty switch in light of the recent debate generated by the rule change, you may want to do some digging. Why did she make this change? If she is afraid of being perceived negatively, this may impact your opinion of her business practices. Perform your due diligence and research reviews of the advisor, read articles about her company, and ask for references. You want to ensure that you choose an advisor whom you believe in and trust.

4. If you are not a fiduciary, why do you think this standard is not necessary?

If you’re considering a retirement advisor who does not operate with a fiduciary standard, you should challenge him on this issue. Ask the advisor why he doesn’t believe the standard of always acting in clients’ best interests is the best business practice for him. You may find that such advisors are operating from a biased and selfish position.

5. If you are not a fiduciary, what is your fee structure?

If you’re considering a retirement advisor who is not a fiduciary, research her fee structure diligently. In such a scenario, you don’t have the implicit trust that the advisor will always act in your best interests. A complex fee arrangement could lead to myriad initial fees, back-end fees, expense ratios and potential percentage deductions on your returns.

6. Does being a fiduciary affect the products you offer?

A fiduciary retirement advisor will not offer products designed to generate unnecessary or excessive fees. For example, the actively managed mutual funds that many nonfiduciaries recommend are accompanied by a sales charge when you buy and sell, which can vary from 4% to 8%. On top of that, with an actively managed fund, you will also pay 1% to 2% per year in management fees. All of these fees will cut into your gains and reduce your overall return. You will find that many fiduciary retirement advisors offer less biased products, such as passively managed funds that charge a much smaller management percentage, which varies from 0.1% to 0.2%.

7. How does the fiduciary standard affect your relationship with your clients?

Your retirement advisor’s relationship with his clients is an important topic to explore. Clients know that fiduciary advisors hold themselves to strict federal guidelines in all of the decisions they make. This helps build trusting business relationships with clients.

Brad Sherman is a financial planner and the founder of Sherman Wealth Management in Gaithersburg, Maryland.

This article also appears on Nasdaq.