Fiduciary Financial Advisors: What Brokers Don’t Want You To Know

Have you ever wondered why some people seem to have their finances all figured out while you’re left scratching your head? It might come down to one word – fiduciary. A term thrown around in financial circles, yet many people gloss over it, some can’t even pronounce it. Most don’t realize its impact on your financial security.

A large portion of people (I haven’t seen a study to confirm this, but I suspect it’s >60% of the population) self-manage their own financial planning and investment management. They create their budget , invest their own money, buy their own insurance, and create their own will or trust.

The other (I’m guessing again) 40% of people hire a professional financial advisor to help them do all of those things. Those people want an expert looking over their shoulder, improving their financial plan and maximizing their tax savings among other things.

The truth is not every advisor wearing the “financial guru” hat acts as a fiduciary . Shocking but true! The difference between having an advisor who’s legally bound to act in your best interest (a “fiduciary) versus one who isn’t could make or break your financial future and your retirement life.

What is a Fiduciary?

In general, a fiduciary is a person or organization that acts on behalf of another person or organization generally in financial related matters. A fiduciary must put their client’s best interests first and foremost above all else, especially their compensation.

A fiduciary is much more than just a financial advisor or other type of advisor, however, because the highest duty of care that is owed to the client. Not all financial advisors act as fiduciaries, some operate under what’s called “suitability standard” which simply means (in their opinion) the actions or investments must be “suitable” even if they’re not entirely in the client’s absolute best interests.

In the realm of financial planning and investment management, understanding the role of a fiduciary is crucial for anyone looking to secure their future and manage assets effectively. This level of trust and responsibility forms the cornerstone of any fiduciary relationship.

Different Types of Fiduciaries

• Power of Attorney (POA): Through a POA, you can be named as someone’s financial decision-maker should they become unable to manage their own affairs. Acting under this directive means adhering strictly to its terms while prioritizing the client’s interests. Most fiduciary financial advisors will have a limited power of attorney for their clients.
• Guardians or Conservators: These roles involve managing either all or aspects of another person’s life due to incapacity or disability, focusing on property and personal care.
• Trustees: If you’re appointed as a trustee, your duty involves overseeing assets within a trust according to its stipulations for beneficiaries’ benefits.
• Social Security Representative Payees and VA Fiduciaries: Specifically designated for managing Social Security benefits or veterans’ affairs respectively; these positions require meticulous attention to beneficiary needs and legal compliance.

Becoming familiar with these roles helps in identifying what expectations one might have when engaging with—or serving as—a fidiciary. Whether considering naming someone else in such a capacity through instruments like trusts or POAs, understanding these distinctions ensures informed decisions are made that protect everyone involved.

Understanding Fiduciary Financial Advisors

A fiduciary, derived from the Latin term for “trust”, is a person owing a fiduciary duty to another. A person with a fiduciary duty is obligated to act in the best financial interest of another, prioritizing their benefit in all related decisions. Owing a fiduciary duty to a party creates a fiduciary relationship.

We’ve unpacked the details of what makes the best of the best fiduciaries so very good – from the significance of the fiduciary standard to what exactly you can expect in terms of their roles and responsibilities. A fiduciary is an individual or organization entrusted to act on behalf of another party, often with the responsibility of managing investment or real estate assets (as in the case of a fiduciary financial advisor). This role demands that they prioritize the best interests of those they represent as if making decisions for themselves.

Various laws may govern their actions, ensuring accountability and integrity in their duties. Fiduciaries can include financial advisors, accountants, trustees, executors, or board members who manage money or make critical decisions for individuals, families, businesses, or other entities. Essentially, anyone appointed to handle your personal legal or financial affairs could be considered a fiduciary. Their primary obligation is to serve your best interest above all else.

Why It’s Important to Work with a Fiduciary Financial Advisor

Opting for a fiduciary financial advisor can offer you enhanced peace of mind, knowing your money is in hands that are legally bound to act in your best interests. Fiduciary financial advisors typically face fewer conflicts of interest and are required by law to disclose any that might arise.

This obligation towards transparency means they must engage in open discussions about their decisions concerning your finances, ensuring you’re fully informed about matters affecting your wealth and future. Essentially, the fiduciary standard helps ensure greater clarity and trust between you and the professional managing your investment assets.

Types of Fiduciary Relationships

The concept of “fiduciary” covers a wide variety of scenarios, leading to a few distinct fiduciary relationships. Let’s explore some of the key types that are most commonly recognized and significant in their applications.

Financial Advisors and Clients

When you begin a working relationship with a financial advisor, you essentially give them access to manage your money and investments, typically at their discretion, enabling them to make choices without needing your consent. Because of this, an advisor’s role as a fiduciary is incredibly important.

You need to be able to trust that your financial advisor is making decisions that are in your best interests. If your fiduciary advisor recommends a product, like an insurance policy, it’s essential to know they have your best interests at heart (rather than a big fat commission check).

Legally, minors are unable to make significant decisions independently. Consequently, the government assigns a guardian to act on their behalf. This trust is based on the expectation that the guardian prioritizes the minor’s welfare until they reach adulthood. Hence, in legal terms, guardians are recognized as fiduciaries because of their obligation to act in the best interest of those they’re responsible for.

Boards and Shareholders

In the business realm, company direction is steered by its board members. These individuals are tasked with making decisions on behalf of a diverse group of shareholders, to whom they owe a fiduciary duty. This obligation ensures that board members diligently explore all available options before reaching any decision, safeguarding shareholder interests against self-serving actions by the board.

Under the fiduciary standard, shareholders can trust that the board has thoroughly investigated every possible path before settling on a course of action for the company. This leads to the best possible expected outcomes.

Lawyers and Clients

The attorney-client relationship is one of the most well-known fiduciary relationships. Lawyers have a legal obligation to act in the best interests of their clients, keep client information confidential, and avoid conflicts of interest. This fiduciary duty is a cornerstone of the legal profession and helps ensure that clients can trust their lawyers to provide competent and loyal representation.

Fiduciary Duty vs. Suitability Standard

Financial financial advisors must adhere to the fiduciary standard. Non-fiduciary financial advisors (stockbrokers, insurance salesmen, etc.) are only held to a suitability standard when providing guidance to their clients.

These standards reflect different levels of obligation towards clients. As noted financial industry expert Michael Kitces puts it, “Suitability is like selling a suit that fits; fiduciary duty ensures the suit also looks good on you.” This analogy highlights the deeper care and responsibility entailed by a fiduciary commitment compared to mere suitability.

Essentially, someone can be a financial advisor but not be a fiduciary, and it’s important for potential clients to know the differences.

When Fiduciary Duty Is Breached by a Financial Advisor?

A fiduciary duty is a legal obligation to prioritize another’s interests above your own. When someone holds a fiduciary duty towards you, their actions must benefit you financially, not themselves through indirect gains like kickbacks. This relationship mirrors the trust and responsibility seen between doctors and patients, where the caregiver’s primary concern is the patient’s well-being.

Violating this duty can lead to severe repercussions for financial advisors, including potential lawsuits from clients seeking compensation for damages and disciplinary measures from regulatory entities such as the SEC or FINRA. Essentially, those with a fiduciary responsibility must act with utmost integrity and in the best interest of those they serve.

How the Suitability Standard Could Affect Your Service

Under the suitability standard, advisors are only required to make recommendations that are suitable for their clients based on factors like their risk tolerance and investment objectives . They are not required to put their client’s interests ahead of their own or disclose all potential conflicts of interest. This means that under the suitability standard, an advisor could recommend an investment that pays them a higher commission, even if a similar investment with lower fees would be just as suitable for the client (and actually in their best interests). As long as the recommendation meets the general suitability criteria, the advisor is not obligated to recommend the option that is best for the client.

How to Find a Fiduciary Financial Advisor

A fiduciary is a good word to hear when you’re searching for a financial advisor. A fiduciary financial advisor aims to reduce conflicts of interest, ensure transparency, and uphold the trust bestowed upon them. Specifically, these financial advisors are required to act in their clients’ best interests.

• They must put their client’s best interests before their own, seeking the best prices and terms.
• They must act in good faith and provide all relevant facts to clients.
• They must avoid conflicts of interest and disclose any which may arise to their clients.
• They must do their best to ensure the advice they provide is accurate and thorough.
• They must avoid using client assets for personal gain, like buying securities for oneself before purchasing them on behalf of a client.

Tips for Finding a Financial Advisor

There are several resources available that can help you know if an advisor is a fiduciary. TheNational Association of Personal Financial Advisors (NAPFA) has an online search tool that makes it easy to find certified financial planners in your area. Every advisor in that system operates on a fee-only basis and promises to act as a fiduciary. Additionally, the Certified Financial Planners Board has an advisor search tool, as does the Financial Industry Regulatory Authority (FINRA). However, the vetting process shouldn’t end there. After pinpointing potential advisors, it’s crucial to ask them specific questions to confirm they meet your requirements and have minimal conflicts of interest.

• Are you a fiduciary financial advisor?
• How are you compensated?
• What certifications and licenses do you have?
• What services do you offer?
• What is your investment philosophy?
• Can you provide references from other clients?

Not only should you know the answers to those questions, but you should get that in writing!

Are Robo-Advisors Considered Fiduciaries?

Robo-advisors, which provide automated investment management services online, are often registered investment advisors and therefore held to the fiduciary standard. However, not all robo-advisors are fiduciaries, so it’s important to research a specific robo-advisor’s legal obligations before using their services.

Even if a robo-advisor is a fiduciary, it’s important to remember that they provide a more standardized service than a traditional financial advisor. Robo-advisors typically use algorithms to create and manage portfolios based on your risk tolerance and goals, but they may not be able to provide the personalized advice and comprehensive financial planning that a human advisor can.

Working with a Fiduciary Financial Advisor

What to Expect

When working with a fiduciary financial advisor, you can expect a high standard of care and a commitment to acting in your best interests. A fiduciary advisor should:

• Provide clear, honest communication about their services, fees, and any potential conflicts of interest.
• Take the time to understand your financial situation, goals, and risk tolerance.
• Offer personalized advice and recommendations based on your unique circumstances.
• Regularly monitor and adjust your financial plan as needed.
• Be transparent about how they are compensated and any fees associated with their services.

How Fiduciary Advisors Are Paid

Fiduciary financial advisors can be compensated in several ways:

• Fee-only: These advisors are compensated solely by the fees paid by their clients. They do not receive commissions or other incentives for recommending certain products.
• Fee-based: These advisors receive a combination of fees paid by clients and commissions from financial products they sell. While they may be fiduciaries, the commission-based portion of their income could create potential conflicts of interest. It’s important the fiduciary financial advisor discloses the commissions they may receive for recommending one investment product over another.
• Commission-based: These advisors earn mainly through commissions from selling financial products. They are generally not considered fiduciaries and may be more likely to recommend products that provide them with the highest commissions.

Is Hiring a Fiduciary Advisor Worth the Cost?

Working with a fiduciary financial advisor can provide peace of mind and the assurance that your financial well-being is the top priority. While fiduciary advisors may charge higher fees than non-fiduciary advisors, many people find the added level of trust and transparency to be worth the cost.

Ultimately, the decision to work with a fiduciary advisor depends on your individual financial needs and preferences. If you value personalized advice, a comprehensive approach to financial planning, and the assurance that your advisor is legally obligated to act in your best interest, a fiduciary advisor may be the right choice for you.

This article has illustrated that the term “fiduciary” extends far beyond the jargon of Wall Street. It plays a significant role in areas much broader than just finance or investment discussions. So, when considering who will provide you financial guidance and advice, remember the importance of the fiduciary concept. Let “fiduciary” serve not merely as another item to check off, but as a key to securing your financial well-being through trusted partnerships.