Lawyer: Are You Referring Clients to Non-Fiduciary Money Managers?

By Amy Parvaneh, CEO of Select Advisors & Co.

Clients often look to lawyers for referrals to financial advisors. But while you as a lawyer are bound by a fiduciary standard, you may be surprised to learn that the advisors in your network are likely not.

Here’s the background: More than 80% of financial advisors are technically brokers rather than true, objective advisors. Governed by a self-regulatory organization, brokers are subject to what’s known as the suitability standard.

This fuzzy standard requires that the investments brokers sell clients must merely be “suitable” for their needs, rather than best for their needs. In practice, this means that brokers may recommend an investment that pays a higher sales commission than a comparable or even superior one.

While most brokers may be ethical individuals, this conflict of interest creates a continual temptation to place their interests before their clients’.

The good news is that there is a category of conflict-free advisors, which are monitored by the Securities and Exchange Commission or the regulators in states where they are registered. These Registered Investment Advisors (RIAs) are bound by a fiduciary standard under the Investment Advisers Act of 1940.

Fiduciary advisors are obligated to place their clients’ interests ahead of their own. Thus, RIAs typically charge a fixed fee for advice only, and do not sell investments or earn sales commissions. Freed from a financial incentive to recommend one product over another, the RIA can focus solely on identifying for their clients investments that are superior in performance, cost and other factors.

Most of the public—and indeed, most of the legal community—is unaware of the distinction between brokers and fiduciary advisors. But lawyers who understand it say that referring to fiduciaries can help to satisfy their own fiduciary obligation.

“It is an added layer of comfort knowing that, by law, RIAs are held to a higher standard,” says Garden City, N.Y.-based lawyer Maryam Franzella, whose clientele includes high-net-worth individuals.

Typically, lawyers refer clients to “advisors” at marquee Wall Street brokerage houses. While these names may have a prestigious association, their advisors are typically brokers rather than fiduciaries.

Lawyers who don’t have relationships with fiduciary advisors can turn to firms such as Select Advisors for referrals. Select Advisors, based in Newport Beach, Calif., is itself a fiduciary RIA that matches high-net-worth clients (and their trusted professional partners such as lawyers) with fiduciary advisors.

Selected through an unbiased due-diligence process, our network of advisors manages more than $1.5 billion for clients throughout the country.

However you as a lawyer identify RIAs, we highly recommend that you consider these fiduciaries for your client referrals. After all, every professional who works with your client should be bound by the same high standard of care as their lawyers are.