Do I still need a fiduciary?

Steve Merrell |

In last week’s column I wrote about the SEC’s new regulation for investment advisors and broker-dealers called Regulation Best Interest, or Reg BI for short. I discussed how Reg BI will require broker-dealers to elevate their advice from a “suitability standard” to a “best interest” standard. In other words, it will no longer be good enough for brokers to recommend investments that are merely “suitable” to your particular situation. Instead, brokers will need to make recommendations that are your “best interest”—a standard that more closely approximates the fiduciary standard, at least in theory.


Since I have long advocated for working with financial advisors who are legal fiduciaries, Reg BI raises an obvious question: Is the fiduciary standard still important or a “best interest” mandate good enough? For several reasons, I still believe most investors are better off working with an advisor who is a fiduciary.


In the world of retail financial advice, there are two basic operating models: the product sales model and the fee-for-service model. The product sales model is the most common, though the fee-for-service model has been gaining popularity in recent years.


Under the product sales model, financial firms hire representatives to sell financial products. These products can take many forms including individual securities, insurance products, mutual funds and more. Many of these financial firms are large institutions with national brand recognition like brokerage firms, banks, insurance companies, mutual fund companies, or even some financial planning companies.


Fee-for-service firms, on the other hand, are usually small, independent advisors though some national-scale advisors are beginning to emerge. Under the fee-for-service model, advisors get paid to provide a service—usually financial planning, financial advice or investment management—much like a CPA gets paid for providing accounting services or an attorney gets paid for legal services. And like CPAs and attorneys, fee-for-service financial advisors do not sell financial products. They are fiduciaries and operate under the fiduciary standard.


Think how strange it would be if your accountant or attorney earned revenue from a third party for selling you some kind of financial product. That would be a clear conflict of interest and would violate the fundamental nature of your relationship. So it is with financial advice and services. A product sales professional is fundamentally conflicted—even if he ostensibly puts your best interest first.


The picture gets a little muddled when product sales companies pretend that they are fee-for-service advisors. The success of the fee-for-service model in recent years has prompted many brokerage firms to offer something called “fee-based” advice. Fee-based advice means the broker is allowed by his broker-dealer to charge you a fee for serving your account, sometimes in lieu of commissions. However, the broker and his firm may still be getting paid by a product company to put you in their mutual fund or other investment. In other words, they collect from you and from a third party. Can you see the inherent conflict? Reg BI will require better disclosure of those kinds of conflicts, but I say work with a fiduciary and avoid the conflict altogether.


Fiduciaries also bring other benefits. For example, fiduciaries tend to be much more oriented toward long-term client relationships. When they make a recommendation, you can generally expect the fiduciary will be there with you as the recommendation plays itself out. Fiduciaries also tend to be very transparent about their business and their recommendations.

Although Reg BI will not become effective until next June, you can begin having it work for you right now. When you next meet with your advisor, ask her how Reg BI is going to change how she operates. Ask her how she makes money, including commissions, revenue sharing and 12b-1 fees. You may find that Reg BI opens the door to some very interesting discussions.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to