My Financial Advisor Has Money Troubles: Fiduciary Obligations and Your Right to Know

When Your Financial Advisor’s Background is Your Business, Too

There are several considerations when selecting an investment advisor, like your financial advisor’s background and money issues. It’s also important to account for whether that person has had any financial difficulties in the past.

Due to fiduciary obligations, your advisor is ethically required to disclose things such as possible conflicts of interest. But are investment and financial advisors under a legal obligation to disclose past financial troubles? What questions should you ask a potential advisor to make sound decisions?

Establish an Honest and Open Rapport

Perhaps unlike discussing a possible conflict of interest, which advisors are required to disclose, it can be embarrassing for a financial advisor’s money issues to be part of the conversation. However, some advisors say that talking about past money issues can be a great boon for business. This should come as welcome news for investors. The more you know about an advisor’s finances, the better you’ll be able to evaluate whether they have the expertise you want.

In fact, David Edwards, president and founder of New York City-based Heron Wealth, noted that after he informed his clients about his costly divorce, a rapport and level of trust developed that may not have otherwise existed. This bond is something that investors care about deeply.

Fiduciary Obligations: FINRA and Government Disclosure

Disclosing past money issues as a voluntary business practice is one thing, but what steps do advisors need to take in order to stay on the right side of the law? What role does the government play in regulating investment advisors?

In October 2023, the Biden administration released new rules strengthening requirements concerning what investment advisors must disclose when advising. Thomas D. Giachetti, an investment advisor with Stark and Stark, broke down what the proposed rule changes entail.

According to Giachetti’s analysis, the proposed rule further requires financial institutions to:

• Include a written statement of the best-interest standard of care owed by the financial institution alongside its initial fiduciary disclosure.
• Inform retirement investors of their right to obtain specific information regarding costs, fees, and compensation from the institution.

Regarding those costs, Giachetti notes, “The financial institution would need to provide the information in sufficient detail for the retirement investor to make an informed decision, including total compensation that the financial institution and investment professional receive, not just the costs directly paid by the retirement investor.”

Mistakes Can Happen

Unfortunately, even the well-respected Certified Financial Planner Board of Standards, which markets its directory of CFPs as the golden standard, has failed to disclose many of its planners’ financial troubles. In July 2019, reporters Jason Zweig and Andrea Fuller published an article in The Wall Street Journal that revealed major regulatory oversight.

According to the article, the Board had failed to provide adequate oversight of over 6,300 planners. Over 5,000 of those planners had formal complaints lodged against them from clients. Nearly 150 were subject to felony charges. Hundreds of advisors faced disciplinary action from financial regulators and/or left their firms due to allegations. The complaints and charges uncovered ranged from shady sales practices and advice to, in one case, child pornography.

However, the CFP Board has adopted new sanction guidelines that take effect on July 1, 2024. They’ve attempted to increase their enforcement policy in the last few years, increasing sanctions and allowing more public transparency regarding public sanctions.

A Good Financial Advisor Will Have the Right Answers

One of the most important questions you should ask your financial advisor is, “Are you a fiduciary 100% of the time?”

As part of fiduciary obligations, a fiduciary financial advisor is legally required to put your interests first, right? Taylor Schulte of Define Financial explains why asking this question is so important: “A fiduciary is also prohibited from selling you a financial product (e.g., annuity, mutual fund) in return for a commission. Their compensation must come directly from you (the client) and be a transparent line item on your statement.”

When interviewing advisors, ask whether they are a fiduciary 100% of the time, Schulte says, because you want to know if they are dually registered. “Dually registered” financial advisors, Schulte warns, “can take their fiduciary hat on and off.”

It’s essential for investors to ask a potential advisor about fiduciary obligations, as well as why the advisor is not a fiduciary. Non-fiduciary advisors are sometimes considered brokers/dealers rather than advisors by definition. If the advisor is non-fiduciary, they should have a good explanation.

We think you’ll also like:

1. 5 Questions to Ask Before You Hire a Financial Advisor
2. Understanding Behavioral Finance and Your Financial Advisor’s Biases
3. Choosing a Financial Planning Advisor: No Magic Involved

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Complex Financial Litigation / Common Issues and Strategies in Business Breakups
2. Raising Capital: Negotiating with Potential Investors
3. Corporate & Regulatory Compliance Boot Camp / Procurement & Government Contracting Compliance

This is an updated version of an article originally published on December 10, 2019.]

©2024. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.