Is Your Financial Adviser a Fiduciary? And What It Means If They’re Not

The average person generally doesn’t understand a lot about the intricacies of investments. You put away a little for retirement each month, but what’s the best way to maximize it and build your nest egg?

Many people hire a financial adviser to take care of these decisions for them, for a small fee. It’s assumed that they have the knowledge and experience necessary to make smart investment decisions, and that they’ll act in your best interest to grow your portfolio as much as possible. Unfortunately, neither of these things is necessarily true.

Financial Advisers, Financial Planners, and Fiduciaries

The first mistake people make is assuming that all financial experts are essentially the same when it comes to investment advice. But there are several different types. A financial adviser is just a generic title that can be applied to anyone offering money advice. A person holding this job doesn’t necessarily have to have any education or experience in the field at all.

financial planner, on the other hand, must go through a rigorous testing process, followed by three years of practical experience, in order to obtain a Certificate of Financial Planning. Unfortunately, many large investment firms, including Wells Fargo Advisers and Merrill Lynch Global Wealth Management, do not require their advisers to have a CFP.

The most important distinction, though, is between regular financial advisers and fiduciaries. If your adviser is acting as a fiduciary, then they are required by law to act in your best interest at all times. If your adviser is not a fiduciary, then they could be choosing investments based on what will make them the most money, rather than you.

The Fiduciary Rule

The good news is that legislation has been enacted to ensure all financial advisers act in a fiduciary capacity, so that you can trust that, whoever you go to for investment advice, they’re acting in your best interest. The Department of Labor Fiduciary Rule was originally proposed in April of last year, and was scheduled to be enacted gradually, between April of this year and January of 2018.

Unfortunately, it appears that this rule may be delayed a while longer. A directive issued by President Trump at the beginning of February would delay it for an additional six months, during which it could undergo significant changes. Furthermore, in January, legislation was introduced in Congress which could further delay the rule’s implementation by another two years.

Is a Managed Account Even Worth It?

In light of the difficulties with financial advisers, many would suggest forgoing an actively managed portfolio entirely and instead putting your money into an index fund. The goal of an index fund is for its returns to remain even with a specific market index, such as the Dow or the S&P 500. That is, whatever the market does, rise or fall, your investments should rise and fall by approximately the same percentage.

Actively managed funds, on the other hand, rely on the expertise of financial advisers, planners, or fiduciaries, to try and beat the market and yield a bigger return. This is great in theory, but unfortunately, it doesn’t always work that way. As with any investment, the higher the potential yields, the higher the risk as well. To emphasize, in a 10 year study, between 82% and 88% of managed funds failed to perform better than their index benchmarks. In fact, 66% of the time, they produce smaller returns.

That’s why the most important rule of investment is to diversify. That means not just buying all different stocks, but putting your money in different types of investments.

Gold tends to go up when the markets go down. Therefore, a gold IRA is perfect in this regard. So, if your stocks should lose value suddenly, or in case of another crash like the one in 2008, you have a cushion to fall back on. Your gold investment is separate from your stocks, which prevents you from losing everything. With a financial adviser, it’s difficult to know where you stand or whose interest they’re looking out for. But with a secure investment like gold, you know your portfolio is in good hands.