And Why You Need to Start Caring Now

As an investor you have probably heard a lot of discussion around the fiduciary rule. The rule, after being delayed by President Trump’s executive order calling for a review, was implemented on June 9 (and in full effect as of January 1, 2018) requires that “financial advisers to put their customers’ interests ahead of their own — at least when handling their retirement money.”

Why does the rule matter to you? The rule is set to protect consumers and investors from different approaches to running investment businesses that result in conflicts of interest—and thus—cost investors more money.

And it’s a LOT of money.

As U.S.News noted in their money blog, “Obama’s Council of Economic Advisers estimated that non-fiduciary advice costs Americans 1 percentage point of their return annually, which amounts to $17 billion each year.” If you don’t think 1 percentage point is significant, imagine that you have $500,000 in retirement. Non-fiduciary advice could cost you $5,000 annually—on top of your existing investment fees.

This has become such an issue in the investment industry that the U.S. Securities and Exchange Commission created an ad campaign around it. Consider these ads they created to help investors protect themselves from investment fraud, and to be aware of the risks posed by working with an unregistered financial advisor:


Given this, what I’d like to do today is look at the differences between a fiduciary and non-fiduciary, look briefly at the different types of fiduciaries, see how you can tell the difference, and talk about whether it REALLY matters to you.

So what is the difference between a fiduciary and non-fiduciary investment advisor?

Don’t feel bad at all if you don’t know what a fiduciary is. Most people don’t—or didn’t. According to Andrew Osterland, author on the CNBC Advice and the Advisor blog, most Americans don’t know what a fiduciary is, or even understand what it is.

First, let’s look at what an investment advisor fiduciary is. According to Investopedia, a fiduciary is “a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other’s best interests.” It’s this last piece that we’ll focus on today: acting in your best interests.

Typically, investment advisor fiduciaries are registered with a state securities regulator or the SEC, and get paid asset management fees. By law, if they don’t operate in your best interests, you can sue them.

On the other hand, there is another class of investment advisor that are regulated by state insurance regulators or the Financial Industry Regulatory Authority (FINRA). These include (but aren’t limited to insurance agents, stockbrokers, and broker-dealers, and are responsible for meeting a different standard of conduct; the “suitability” standard of conduct. This class of professionals is considered “non-fiduciary” investment advisors.

In this case, according to Osterland, recommendations need to be appropriate or “suitable” for the investor’s “financial profile” but “advisors are not required by law to act in their clients’ best interest”. Because of this difference, advisors in this group can often be compensated to make recommendations that are in conflict with your best interest.

Based on this definition alone, it just doesn’t make sense to choose a non-fiduciary investment advisor. They aren’t legally bound to work with your best interests in mind, and on top of that, it can cost you as much as one additional percentage point in fees annually.

If you’re considering working with a fiduciary, there are four types you can consider.

What are some of the different types of financial advisor fiduciaries?

Michael Kitces, financial planning strategies and practice management expert, defines four unique fiduciary financial advisors. These include:

SEC Fiduciaries

As noted above, SEC Fiduciaries are regulated by the state or SEC, and must act in your best interest. Registered Investment Advisors that fall under this category “cannot engage in any acts that would be fraudulent, deceptive, or manipulative when they hold out to consumers.” Kitces goes on to say that this type of “investment adviser is really focused heavily on being clear and transparent with clients about what [they’re] doing… charging, and any potential conflicts of interest.” They really are working in your best interest.

Department of Labor Fiduciaries Serving Retirement Investors

Earlier we discussed investment advisors who are regulated by state insurance regulators or the Financial Industry Regulatory Authority (FINRA). These advisors are held to the suitability standard, UNLESS they are advising you on your retirement assets. If they are advising you on your retirement then they are required by the new law to use the fiduciary standard instead of the suitability standard.

CFP Fiduciaries Providing Financial Planning

Think of this like you would the above scenario. You can work with a Certified Financial Planner but they might not be considered a fiduciary. That title is reserved for the type of work they do for you. If they simply purchase a mutual fund for you then they are not bound by the fiduciary standard. However, if they create a financial plan and subsequently execute the plan on your behalf, they will be considered a fiduciary for the life of the relationship.

Voluntary Fiduciaries

A voluntary fiduciary is exactly what it appears to be via the name—someone who states, or volunteers, that they will be one, and then complies with the standards associated with that. Typically this would be an investment advisor who is a member of a group or organization and, as part of their requirements of membership, must pledge to work as a fiduciary for their clients, and operate with clients’ best interests an example of one of these organizations in the National Association of Personal Financial Advisors or NAFPA.

How can you tell the difference?

There are a few ways to tell quickly a fiduciary from a non-fiduciary financial advisor. Danya Karram of Brilliant Advice notes that there is an easy way to tell.

According to Danya, “Financial advisors who are fiduciaries will want to know your history.” Basically they want to know EVERYthing about you. Family, investment history, hopes, dreams—the works. A non-fiduciary is more concerned with what they can sell you—and probably less concerned with your particular situation or needs.

Does it REALLY matter to me?

Here at Granite Investment Advisors, we have always been a registered investment advisor with SEC under the Securities Act of 1940.(1) We’ve always been held—and hold ourselves—to the highest standard, regardless of changes in industry. Given this, we truly believe that it does matter to you as an investor—and as a person who values transparency and fairness.

If your investment advisor ISN’T working with your best interests at heart, then how can you trust that they are making decisions that will benefit you in the long-term?

At Granite, we take it one step further: our 401k is invested using the same strategy as the one we employ on behalf of our clients. At the end of the day, we are experiencing the same results as our clients do. Ultimately, we’re “drinking our own Kool-Aid.”

Are you currently working with a non-fiduciary investment advisor and looking for some guidance? Give us a call, or email me personally for a no-obligation conversation.


Past performance is no guarantee of future results. Returns are presented net of management fees. There can be no assurance that any of the securities referred to herein were produced for or remain in portfolios managed by Granite Investment Advisors. A complete list of all Granite Investment Advisors’ recommendations within the preceding year is available upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities described herein.

(1)Registration does not imply any level of skill or training