What Is A Fiduciary Financial Advisor?

A fiduciary refers to an individual who acts in the best interests of his client at all times and puts the clients’ interests ahead of his own. A fiduciary has a legal and ethical obligation to preserve their clients’ trust. A fiduciary is a financial advisor registered with the U.S. Securities and Exchange Commission (SEC), or any state securities regulator, who is legally bound to act with integrity and loyalty towards their client and their clients’ interest and not their employer i.e. a brokerage firm or fund house. Fiduciary financial advisors take care to find suitable products that fit their client’s portfolio after careful analysis to achieve their client’s goals and objectives. If you’re looking for a financial advisor who is bound to put your financial interests ahead of their own by providing financial advice based primarily on your financial needs and goals, consult a fiduciary financial advisor.

We will take you through the important things that you need to know about fiduciaries and their duties, and why you should hire a fiduciary financial advisor, the benefits of making such a decision, and why you should consult them for financial advice.

Why do I Require the Services of a Financial Fiduciary?

Hiring a financial advisor is an important decision that needs to be made after giving due thought to your future goals. Your financial advisor’s decisions would have an impact on your future lifestyle, hence, it is essential that you hire the right person. Many people assume that a financial professional would act in their client’s best interest; however, that is not the case, always. There are several kinds of advisors, some of whom are incentivized to sell various financial products to their clients, irrespective of the fact that these products serve clients’ best interests or not.

Financial fiduciaries are legally bound to protect and serve in your best interests. Take a Registered Investment Advisor (RIA) for instance. He does not sell specific products to his clients but instead acts in a fiduciary capacity wherein he offers financial advice and solutions based on their needs, placing the clients’ interests above all else.

What are the Duties of a Fiduciary Advisor?

A fiduciary advisor is bound to perform both legal and ethical duties within the purview of their role. They must ensure the following:

• Place their clients’ interests above all, even before their own, while offering financial advice or recommending suitable financial instruments and products.
• Be transparent, act in good faith, and furnish all relevant facts to clients.
• Be loyal towards their clients at all times.
• Be open and transparent about any potential conflicts of interest to their clients and avoid any situations that may lead to conflicts of interest.
• Ensure that they provide accurate, well-researched, and exhaustive financial advice to their clients always.
• Avoid that they do not use their client’s assets for their own personal benefit; for example, pushing financial products where they would earn a higher rate of commission when the said product does not fit the client’s risk appetite or financial goals.

Which Kinds of Advisory Relationships Constitute Fiduciary Duties?

• Trustee and beneficiary
• Executors and legatees
• Promoters and stock subscribers
• Insurance companies or agents and policyholders
• Corporate board members and shareholders
• Guardians and wards
• Investment corporations and investors

How Do Fiduciary Duty and Suitability Standards Differ from Each Other?

According to the Investment Advisers Act of 1940, a financial expert or advisor or any individual who offers investment advice is legally bound to act in the best interest of their client and has a fiduciary duty towards that said client. This entails that a fiduciary must avoid a conflict of interest, cannot earn commission from recommendation and sale of financial products, and must place their clients’ interests before their own personal interests. Since fiduciaries are neutral when it comes to recommending investment products, they are seen as ideal financial advisors. All fiduciary advisors are mandated to fulfill their fiduciary duties when offering their services.

On the other hand, financial planners and brokers are not governed by a uniform standard of service or mandated by fiduciary duty. They however do follow a suitability standard wherein the advisor must have a reasonable belief that an investment, transaction, or frequency of transactions fits the needs of the customer. This suitability standard is set by the Financial Industry Regulatory Authority (FINRA). Here, the term ‘reasonable belief’ is believed to be ambiguous and open to interpretation by advisors. Since financial advisors do earn commissions from the sale of investment products, there is a distinct possibility that they may push investments to meet their sales targets or to earn a higher rate of commission where the said investments may not necessarily be suitable for your portfolio. Financial brokers also earn fees from transactions, which may lead to churning of portfolios under the guise of suitability standard of service delivery to earn higher fees.

Therefore, it is advised that you procure the services of a fiduciary financial advisor, who performs his fiduciary duties diligently, whom you can trust to make investments that are first and foremost, most beneficial to you.

What are the Benefits of Working With a Fiduciary Financial Advisor?

You can avail several benefits if you choose to work with a fiduciary financial advisor, some of which are as follows:

• Fiduciary financial advisors ensure to invest your finances with the utmost care keeping your investment philosophy, risk appetite, and future goals in mind. Since they place your interests above their own, you can rest assured that your money is in good hands affording you peace of mind. You can take confidence from the fact that a recommendation made by them with regards to an investment product or when to invest more money or rebalance your portfolio, will be made keeping your interests at a priority.
  
• You get an opportunity to engage the services of a trustworthy professional who is legally bound to look after your interests first and foremost, and avoid any conflicts of interest that may interfere with meeting your financial goals and needs. Fiduciary financial advisors are legally mandated to prioritize your interests when providing advisory services to you.
  
• Fiduciary advisors are trained professionals who undertake strenuous training and certification, are highly qualified, and have amassed several years of experience to provide excellent service to you. They also have access to additional resources and networks built through their professional career, such as portfolio managers, who can help suggest lucrative investment opportunities and increase your returns on your investments.

Are Fiduciary Advisors More Accomplished and Better Equipped to Produce Better Results?

When it comes to evaluating a financial advisor’s competence, ethics, and past performance, it can prove to be a challenging affair. Also, even though fiduciary advisors may be more trustworthy compared to non-fiduciary advisors, that does not mean that they would be more competent than their non-fiduciary counterparts. Competence is something that is gained over years and is a mix of experience, education, and legitimate certifications. These certifications require substantial effort, time and hard work to attain and comprise substantial curriculums, proctored examinations, and continuing education. As per experts, around 35 percent of the 260 certifications and designations that are used by advisors may be likely fake.

That said, fiduciaries are motivated to do what is best for their clients and invest considerable time and resources to attain expertise in their field to be better able to guide their clients and deliver superior financial advice, services, and results.

How Do I Find Out if My Financial Advisor is a Fiduciary or Not

You can take the following steps to know whether your advisor is a fiduciary or not:

• Ask for a written acknowledgment from the advisor that they are acting in a fiduciary capacity when providing financial advice and services to you.
• Ensure that the advisor is a Registered Investment Advisor or an Investment Advisor Representative. Make sure that you ask for written verification from them.
• Ensure that the advisor who you are looking to hire is only compensated with either one or more of the following three kinds of compensation: hourly, fixed, or asset-based (percentage of assets).
• Ensure that the advisor provides ongoing advice and services such as timely performance measurement reports, plan of action for the coming year, etc.

Apart from this, there are several resources available to you through which you can find out if an advisor is a fiduciary:

• Fiduciaries are investment advisors who must be registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator. You can request a copy of a financial advisor’s Form ADV and Form CRS that contains information about an advisor’s business, pay structure, educational qualifications, potential conflicts of interest, and disciplinary history. Every advisory firm must file the aforesaid paperwork as mandated by the SEC. This information can also be accessed online through the SEC’s Investment Advisor Public Disclosure (IAPD) tool.

• You can look up prospective financial certified financial planners in your area through the National Association of Personal Financial Advisors (NAPFA’s) online search tool. Additionally, the Certified Financial Planners Board also runs a search tool where you can read about an advisor’s prior experience and history.
  
• You can also ask your financial advisor directly if they are a fiduciary or not and get written verification for the same.

What Questions Can You Ask an Advisor to Find Out if They are a Fiduciary?

When you first meet an advisor, the first few questions that you should ask them are as follows:

1. Are you a fiduciary?

The advisor may respond with a ‘yes’ or ‘no’. If the advisor says ‘yes’, ask them to show a copy of their Form ADV. Form ADV must be filed by an investment advisor to register themselves with the SEC or a state regulator.

If the advisor is unable to show you a copy of his Form ADV, then most likely he is not a fiduciary RIA. Other than this, you can also check for an advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure website.

2. How are you compensated?

Fiduciary advisors are compensated with fees paid directly by their clients in either of the following ways:

• A percentage of the amount invested with the advisor (generally around 1 percent)
• A flat fee for services rendered
• An hourly rate

You can further verify their pay structure in their Form ADV.

3. Do you accept any other forms of compensation?

If a fiduciary accepts any other form of compensation apart from the ones listed above, then they must disclose those in Form ADV. Some fiduciaries employ a hybrid model wherein they accept commission from the sale of products however while doing so they cannot act as fiduciaries. They are allowed to sell financial products only when they are not acting as fiduciaries which must be revealed beforehand in Form ADV.

How Much Does a Fiduciary Financial Advisor Cost?

Typically, financial advisors are either paid in fees, commission, or a combination of both. Fee-only advisors charge either a flat or hourly rate, on a per-service basis or as a percentage of assets under management wherein they do not earn any commission on trading fees. This means that their compensation is not in conflict with the investments they recommend you to buy. On the other hand, fiduciaries are fee-only or fee-based.

What Should I Keep in Mind Before Working with a Fiduciary Financial Advisor?

A fiduciary is trusted to always act in good faith and look out for your interests but that may not always be the case. Though a fiduciary should always be careful while offering advice and other services, their fiduciary duties and interests may sometimes be in conflict with each other. This occurs when one fiduciary represents several clients and the interests of those clients clash with each other. The advisor may try to balance those interests in the favor of either client but it may not work out to the benefit of either client. Thus, it is advised that you vet the fiduciary you’re looking to hire, checking the advisor’s past record with compliances and adhering to best practices laid down by regulatory bodies.

To conclude

Choosing a financial advisor who can grow your finances is an important decision that should be made after proper verification of prospective advisors. You should check and verify the advisor’s credentials, best practices, etc. to ensure that your interests are secured at all times. Since fiduciaries are legally mandated to ensure your best interest, if they make decisions on your behalf without vis-a-vis your investments and future financial plans without consulting with you first, they can be held responsible.

Do engage the services of a fiduciary financial advisor if you are looking for an advisor to manage your finances and grow your wealth after conducting proper verification and vetting their credentials.