Can you trust your financial adviser?

By Liz Pulliam Weston

It's a $10 word, but not knowing it could cost you a fortune.

The word is "fiduciary," and in the world of money it means someone who's committed to putting your financial interests ahead of his or her own.

The word is important because true fiduciaries are harder to find than you might think. Most of the people who want to give you advice about your money aren't held to that high standard. At best, they're held to a "suitability" standard, which means they're supposed to reasonably believe that the investment and insurance products they want you to buy are appropriate for your situation.

Just "appropriate" -- not "the best choice" or "in your best interests."

The high cost of being too trusting

Let's say you have $10,000 a year to save for retirement. Your financial adviser could recommend you invest the money in a low-cost index fund that might net you a return of 8% a year. After 30 years, you'd have over $1.1 million.

But let's say the adviser could earn a fat commission for recommending a higher-cost investment being promoted by his financial-services firm. So instead of netting 8% a year, you might net 6%. After 30 years, your nest egg would grow to just under $800,000, a difference of more than $300,000.

The high-cost investment might be perfectly "suitable," since it meets your financial objective of saving for retirement, even if it could leave you significantly poorer than had you invested in the index fund.

Most people don't understand the difference between fiduciary and suitability standards, said consumer advocate Barbara Roper, director of investor protection for the Consumer Federation of America. The federation's surveys show that the majority of people who work with a financial adviser trust that they're getting good advice.

"Two-thirds of investors aren't second-guessing the recommendations they're getting from their (financial) advisers," Roper said. To be that trusting "outside of a situation where a person is committed to putting your interests first is pretty risky business."

Scrutinize the job titles

Figuring out who's a fiduciary isn't always easy. In the financial-services world, there are three job titles that automatically connote a fiduciary standard:

• Attorney
• Certified public accountant (CPA)
• Registered investment advisor (RIA)

There are several other job titles that indicate the opposite. People who are stock brokers (also known as "registered representatives") or insurance agents are allowed to put their own interests, or those of their firm, ahead of yours.

Fiduciary or not?

Professional title	Is he a fiduciary?
Attorney	Yes
Certified financial planner (CFP)	Maybe
Certified public accountant (CPA)	Yes
Financial planner	Maybe
Insurance agent	No
Registered investment adviser (RIA)	Yes
Registered representative	No
Stock broker	No

But other titles, including "financial adviser" or "financial planner," can be used to imply you're getting good advice without any requirement that said advice be in your best interests.

Salespeople masquerading as professionals

It's a situation that's being exploited by many of today's brokerage and insurance companies, said Bob Veres, editor of Inside Information, a newsletter for financial planners. These financial-service companies have figured out their customers want objective advice, but the companies aren't ready to abandon their commission-based sales model or commit wholeheartedly to the fiduciary standard.

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