What do the terms "fee-only" and "fiduciary" mean?

“It is difficult to get a man to understand something when his salary depends on his not understanding it."

-Upton Sinclair

A quiet battle has been brewing in the financial advisory business over advisor compensation, and more importantly, advisors' fiduciary duties. 

The National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA) have been trying to create differentiation between independent fee-only planners who have a fiduciary duty to their clients versus employees or agents of brokerage firms, insurance companies, or even independent advisors, who receive commissions from the sale of financial products and do not have a fiduciary duty to their clients.

NAPFA defines a Fee-Only planner as one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product.

A fiduciary is a person or firm that has a legal responsibility to put the interest of their clients ahead of their own.  A physician, an attorney and a CPA are generally held to this standard.  Why not your financial advisor?

The large brokerage firms, whose agents receive compensation in the form of commissions, would like to be exempt from the fiduciary and disclosures of the Adviser's Act of 1940.  We strongly oppose any such exemption.  At Leonard Wealth Management, we strongly believe that anyone who is helping people with issues as important as their financial security should be held to a fiduciary standard.  Unfortunately, we are of the minority opinion in the financial services industry.

Educate yourself.  Insist that your financial services professional is independent from obligations to an employer.  A stockbroker who works for one of the major national brokerage firms does not have a fiduciary duty to their client.  They have a fiduciary duty to represent their employer.  If there is a conflict between the interests of a client and the interests of their employer, and there is in every single sale of a commission based product, the interests of the employer takes precedent.