You always want financial professionals looking out for your best interests, not theirs. In the simplest terms, that is what a fiduciary investment advisor does. Fiduciary derives from the Latin Fiducia, which means to trust. Whether the fiduciary involves a person, bank, brokerage firm, attorney, or any other entity acting on another’s behalf, trust is the bottom line. This guide will cover everything there is to know about this subject, including what is a fiduciary, what are their responsibilities, How to find out if your financial advisor is a fiduciary, and more.
Why Having a Fiduciary is Important
Unfortunately, many investors assume their financial advisors proceed with the client’s best interests in mind. Unless your financial advisor is a fiduciary, that is not necessarily the case. When you are shopping for a financial advisor, one of the first questions you should ask is whether or not they are fiduciary.
Besides fiduciary financial advisors, examples of fiduciaries include:
- Business advisors
- Estate administrators or executors
- Title companies
- Trustees of a trust
In February 2020, a new version of the Department of Labor’s Fiduciary Rule went into effect. Under the rule, investment advisors are either fiduciaries or non-fiduciaries.
What Is a Fiduciary Financial Advisor?
A fiduciary financial advisor is legally obligated to always act in a client’s best interests. Even seasoned investors may be unaware that not every financial advisor is required by law to act in the best interests of their clients. This is why some firms may try to sell products that aren’t a good fit for their clients.
A fiduciary financial advisor should make investment recommendations based on an individual client’s situation, not on fees or commissions earned by selling products. Any person or organization acting in a fiduciary capacity is ethically and legally bound to serve the best interests of the party whose assets are under their management. In short, those assets are managed to the owner’s benefit, not that of the investment advisor.
There should also be no conflict of interest between the fiduciary and the owner of the managed assets. Fee-based investment advisors are regulated either by the state or the Securities and Exchange Commission (SEC). A fiduciary has the duty of “loyalty and care,” which is another way of stating that the client’s interests are always put above their own.
Broker-Dealers vs. Fiduciaries
Broker-dealers are sales representatives, not fiduciaries. They must meet suitability standards, which just means their recommendations are suitable for the client. While such recommendations must take their clients’ level of risk tolerance and objectives into consideration, broker-dealers are free to recommend the products paying them the highest commissions if the suitability standard is met. Their loyalty is to their brokerage firm, with client interests secondary. That doesn’t mean a broker-dealer can’t do a good job for clients — but it does mean you could end up paying a lot more in fees.
Rather than earning a flat fee like a fiduciary, broker-dealers make money via commission. That enables less than scrupulous broker-dealers to steer clients away from low or no commission investments and toward those with high commissions solely for their own benefit.
For instance, if two mutual funds — one no-load, one charging a high commission — have similar track records, a broker-dealer could sell the latter to the client, which is not in the client’s best interest. That is not something fiduciary financial advisors can do.
What Are Fiduciary Responsibilities?
Fiduciary responsibility refers to the fiduciary always acting in the other party’s best interests. That holds true for every aspect of the fiduciary-beneficiary relationship. In the case of a fiduciary investment advisor, that means being held to the highest standard and position of trust. Break that trust, and the consequences are severe.
Think of it this way — a fiduciary has a responsibility to save your money before they save their own. Failure to do that can incur huge fines, and possibly jail time.
However, almost all investments have inherent risks. If you lose money or the results are not what you expected, that does not necessarily mean the fiduciary relationship was breached. No financial advisor can guarantee a profit in securities.
How Do I Know If My Financial Advisor Is a Fiduciary?
If you already have a financial advisor, the simplest way to find out if they are a fiduciary is to ask them. If they tell you they are a fiduciary, make sure you have that affirmation in writing. A fiduciary financial advisor should note their status on their website, business cards, and client brochures. All client agreements will include the fiduciary status.
The SEC’s Investment Advisor Public Disclosure website also allows you to determine whether your financial advisor is a fiduciary.
Because the range of fiduciaries is so extensive, it is critical to determine a financial advisor’s education and background. After all, you are entrusting them with your financial future.
How to Find a Fiduciary Advisor
Check out databases of financial advisors like Paladin Registry to begin your search for a fiduciary advisor. Look for advisors with specific titles, such as:
- Accredited investment fiduciary
- Chartered retirement planning counselor
- Certified financial planner
- Investment advisor representative
- Registered investment advisor
These titles all indicate that the professional serves as a fiduciary.
Of course, you can always use word of mouth, and ask financially sophisticated friends, family members or colleagues for their recommendations for a fiduciary advisor.
Some of the top fiduciary advisors include:
- Charles Schwab
- Facet Wealth
- Personal Capital
- Vanguard Personal Advisor
Many people feel more comfortable working with a fiduciary financial advisor in person, but you can also find an advisor online and chat over a video call. For the best results, interview several advisors before you commit. You want someone you feel comfortable with and who answers all of your questions thoroughly. Robo advisors can meet SEC fiduciary standards, but not all of them do.
Do I Need a Fiduciary Advisor?
If you are seeking investment advice, it is wise to work with a fiduciary advisor rather than a non-fiduciary. Keep in mind that you are giving the fiduciary authority over your assets, allowing them to buy and sell securities without needing your permission prior to trading. If you prefer to conduct your own trades, you might still need investment advice, but you are not providing another party with the ability to conduct trades on your behalf.
Advantages of a fiduciary financial advisor include:
- Transparency: You are given all information regarding fees, revenue, reporting, costs and similar issues.
- Avoidance of conflicts of interest: If any potential conflicts of interest do exist, the fiduciary must tell you.
- No payouts: No commissions or payouts are received by the advisor from any investments recommended to you, the client.
- Direct payment: The advisor is paid directly by you, either in a flat fee or a percentage of assets managed. There are no surprises.
Fiduciary and client relationships go beyond that of an investment advisor. For example, if you buy or sell a house, your attorney and your real estate agent are acting in a fiduciary capacity. Corporate directors act as fiduciaries for shareholders. On a personal level, a parent could name you as the executor of their estate. If you take on the role, you have a fiduciary responsibility to the estate and heirs and beneficiaries, always acting in their best interests.
What Questions Should I Ask a Fiduciary Advisor?
You are entrusting your fiduciary advisor with your assets and financial future. If the advisor responds affirmatively to your fiduciary question, ask them to put it in writing. Besides confirming that they are indeed a fiduciary, ask how they define their role as a financial advisor. You would want examples from any other professional whose services you are considering, so request examples of their work.
You also want to know their qualifications. Find out which licenses they hold. For instance, a registered investment advisor holding a Series 65 license is a fiduciary. If the individual holds only a Series 7 license, they are not a fiduciary even though they hold a title such as wealth manager or registered representative.
Make sure you understand exactly how your fiduciary advisor is paid. Find out how your advisor communicates with clients, and how often.
Other questions include:
- What services do you offer?
- What is your investment philosophy?
- How long have you been in this business?
The Financial Industry Regulatory Authority (FINRA) offers a service called BrokerCheck, a free tool to help potential clients research a financial professional’s experience and background. If a complaint against the advisor exists, ask them about it. It may prove inconsequential, or it might determine whether or not you entrust your money with this person.
Protect Yourself and Your Finances
If you are counting on your investments to provide the future you envision — which is investing’s basic purpose —you need to know that the person or institution you are entrusting with your financial future is ethical and looking out for your best interests. Should they fail to keep your interests paramount, they face legal liability. If a broker-dealer or other non-fiduciary rips you off, to put it bluntly, in the form of high commissions or inappropriate investment vehicles, you may have no legal recourse. Peace of mind is a precious thing.