Dec 16, 2015 | Marshall Weintraub and Michael Merrill, CFP, CLU, ChFC
Career Development

Financial planning is becoming increasingly complex, particularly for cardiologists who must decide between student loan repayment methods, how best to save for retirement and which disability insurance to choose in order to protect their income, all with very limited time. Because of this, many cardiologists work with a financial advisor for guidance and help implementing their plan. However, one important characteristic is often overlooked when hiring an advisor – whether the advisor has a fiduciary duty to the client when providing advice. This article will begin by explaining what fiduciary duty is and why it is important. It will then focus on how fiduciary duty is applied, or not applied, by looking at independent versus non-independent advisors.

What is fiduciary duty and why is it important?

Fiduciary duty means acting in another party's best interest. In this context, a financial advisor's fiduciary responsibility is to put the client's interest first. When implementing a client's financial plan, certain situations may arise that present a conflict of interest for the advisor. It is your advisor's fiduciary duty that requires they put your best interest ahead of their own. The importance of this cannot be overstated. If your advisor is not acting in a fiduciary capacity, then he may recommend financial products or strategies that may not be in your best interest.

Independent vs. Non-Independent Advisors

One application of the word, fiduciary, can be traced to an advisor's employment and their recommendation of certain financial products, such as disability insurance or mutual funds. Working with an independent advisor can greatly reduce conflicts of interest when insurance or investment products are used by allowing the advisor to go through a variety of companies to better suit the client's needs. A financial advisor is independent when neither they nor their broker-dealer (the entity that directly oversees their investment activity and transactions) are affiliated (directly or indirectly) with an insurance carrier or investment company that manufactures financial products, underwrites securities, creates research, or engages in investment banking. Lastly, the independent advisor is not an employee of an investment or insurance based firm – they are an independent business owner. They have the freedom to structure their business in a manner that best serves their clients.

An advisor is not independent when the channels that allow him to provide financial products are affiliated with an insurance or investment company. If this is the case, then the non-independent advisor may have a difficult time providing unbiased advice because he may be required by the terms of his employment or financially encouraged to use one company's products ahead of another's, even if this is not in the client's best interest. For example, if a disclosure on an advisor's website states "Securities and investment advisory services offered exclusively through ABC Broker-Dealer" and further in the disclosure it also states "ABC Broker-Dealer is a wholly owned subsidiary of XYZ Insurance Company", then the advisor is likely faced with a conflict of interest. He may only have access to XYZ's products or may be paid more to use XYZ's products than the products of other insurance or investment providers.

Continuing this example is if the client and advisor have agreed securing disability insurance is an important part of the client's plan. The advisor now needs to determine which disability insurance carrier he will recommend. Let's say the advisor has narrowed the selection to two carriers, disability insurance companies A and B. Company A has stronger features and is better priced for this client, but the advisor is employed by Company B and receives significantly more compensation by selling Company B's products. Which company does the advisor recommend? We would hope he recommends the superior policy of Company A; however, we can clearly see the conflict of interest here. The advisor is financially incentivized to recommend Company B's products, even if they are not the best fit for the client.

There are a number of factors to consider when selecting an advisor to work with, one of which should be whether the advisor will have a fiduciary relationship with their clients. We would also encourage you to ask your potential advisor if the compensation they receive from certain insurance or investment companies is greater than other companies. Once you have done your due diligence, then a trusted advisor can be a valuable partner in managing the many areas of your financial plan.

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This article was authored by Marshall Weintraub and Michael Merrill, CFP®, CLU®, ChFC®.

Marshall Weintraub & Michael Merrill are financial advisors with the independent financial services firm, Finity Group, LLC. To ask them questions or arrange a consultation, email them at Marshall.Weintraub@thefinitygroup.com. Office Address: 4380 SW Macadam Ave, Suite 245, Portland, OR 97239. Registered Representative, Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Finity Group, LLC and Cambridge are not affiliated. 155557 11/2015.