Michael Warszawski, CFA, is CEO of CWM Partners, which provides wealth consulting services to family offices. He discusses what family office professionals should know about working with two different categories of financial advisors:
What does it mean to be a fiduciary financial advisor?
In the financial world, you cannot call yourself an advisor unless you are registered as an investment advisor and hold the level of legal and regulatory liability required by a fiduciary duty. Best practices for fiduciary financial advisors, as defined in the “Real Fiduciary Practices” developed by the Institute for the Fiduciary Standard, include ‘a duty of care, demonstrated loyalty and utmost good faith.’
There is another way to do business financially: work for a broker-dealer as a financial professional. Financial professionals are allowed to buy and sell securities from their clients when they’re registered as broker-dealers without a fiduciary duty. They just can’t call themselves advisors.
The difference between a fiduciary and a financial professional is a financial professional will treat their client effectively as an equal participant in a contract, assuming equal understanding of the risks and benefits and costs of a transaction — effectively having the motto: buyer beware. The client is responsible for their own diligence.
The fiduciary responsibility you can think of is similar to a patient-doctor relationship. The doctor has more information than the patient when performing a diagnosis and recommending a treatment. Also, an advisor’s fiduciary duty applies to the full duration and to every aspect of the advisory relationship, whereas a broker’s responsibility is limited to the moment they make a recommendation.
There are some financial professionals who wear two hats: They’re dual registered as a broker-dealer and as a registered investment advisor. A representative could be managing my retirement account, for which they have fiduciary responsibility, and my taxable account, for which they don’t. So, they’re a part-time fiduciary. That is the worst of all worlds. That’s like someone saying, ‘I will be faithful to you on Tuesday afternoons and Thursday mornings.’
Do family offices need to work with fiduciary advisors?
There are many different types of family offices. Some of them are run by investment professionals — they may be already finding their way through the system and won’t be necessarily sold the wrong thing by the wrong person.
Others might be run by other types of professionals: accounting professionals, legal professionals, family members, real estate experts. They could probably benefit from having somewhere on their team at least one person who is intimately familiar with the difference between a fiduciary and a non-fiduciary advisor.
I usually recommend that at least one of the advisors on the team should be a fiduciary — not necessarily all of them, because there are products and services that you might need to get from a broker-dealer. But it helps to have someone on your team who can help you screen those for conflicts and hidden fees, and all of the different things you need to watch out for.
The word ‘fiduciary’ is also used to describe trustees of trusts. How is that different from a fiduciary financial advisor?
Trustees of trusts are fiduciaries in a different way.
One of the differences is a financial advisor, who is supposed to be a fiduciary in most cases, can take on conflicts of interest as long as they disclose them. Trustees of trusts cannot. The trustee of an irrevocable trust has a fiduciary duty to act only in the interest of the beneficiaries — not even in the interest of the grantor.