It’s harder and harder to find someone to trust in finance, but someone who always has your back is know as a fiduciary. Not all advisor are fiduciaries. What does it mean to be a fiduciary, how can you tell if your advisor is a fiduciary, and why does it matter?
What is a Fiduciary?
A fiduciary is like your personal finance superhero. They have a legal duty to put your financial well-being above their own interests. They’re there to provide advice that benefits you, not their pockets. Fiduciaries aren’t allowed to make money off you unless it’s in your best interest, and they have to be transparent about conflicts of interest.
Some non-fiduciary advisors might offer valuable services, but it’s important to double check their work. Their advice may be influenced by the commissions or incentives they receive, which could lead to recommendations that go against your financial goals.
An example self-serving advice
Let’s consider a common scenario: a stockbroker who isn’t bound by fiduciary duty.
This stockbroker, let’s call him Bob, has been working with a client, Alice. Alice seeks to switch from her very safe government bonds to something that can offer higher returns. She trusts Bob’s advice since he has always seemed knowledgeable and professional. Bob suggests Alice invest in a new mutual fund. What Alice doesn’t know is that Bob will receive a hefty commission if she buys into this fund. The carries a higher risk than what would be appropriate considering Alice’s risk tolerance and investment goals.
In this case, Bob’s advice was influenced by his potential for personal gain. A fiduciary advisor, in contrast, would be required to recommend investments that align with Alice’s financial outlook. They’d be obligated to disclose any compensation they receive and how it could bias their advice. That’s the big difference between fiduciary and non-fiduciary advice.
Which financial advisors are reliable fiduciaries?
Not every financial advisor is a fiduciary. Only some are required by law to uphold this responsibility, including:
- Registered Investment Adviser (RIA) Firms: Think of them as the all-stars of your financial team. They’re legally required to act as fiduciaries.
- Investment Adviser Representatives (IARs): They work under RIAs and must uphold the same standard.
- ERISA Trustees: These professionals look after employer-sponsored retirement plans and must also act as fiduciaries.
Who isn’t required to be a fiduciary?
Then there are those who aren’t required to be fiduciaries:
- Stockbrokers: They often work on commission and might push certain investments regardless of your needs.
- Financial Planners: Unless they are otherwise required to be a fiduciary, they aren’t legally obligated to work in your best interest.
- Insurance Agents: They generally earn money from the policies they sell, which can influence their advice.
- Real Estate Agents: They’re required to treat you fairly but are not fiduciaries.
- Bankers: They tend to work towards the best interest of the bank.
Note: Even though Certified Financial Planners (CFPs) aren’t required by law to be fiduciaries, their professional code of ethics does hold them to this standard when offering financial planning advice. If they work for an RIA firm, they are bound by those legal obligations
While these professionals might provide useful advice, it’s important to remember that they may prioritize their own bottom line. Without fiduciary duties, there’s a risk that the advice they offer might be swayed by their personal interests.
How to check if your advisor is a fiduciary
So how do you ensure you’re working with a fiduciary? Simple, just ask! You can ask if they’re a fiduciary and if they’re willing to put it in writing. Plus, you can double-check their status on their Form ADV (for RIAs) or the SEC’s Investment Adviser Public Disclosure (IAPD) website.
To sum it up
Choosing a financial advisor is like selecting a navigator for your financial journey. You want to make sure you’re choosing someone who will guide you to your desired destination rather than their own. That’s the value a fiduciary financial advisor brings: they’re committed to doing what’s best for you. Make the wise choice and let a fiduciary guide you. Your future self will thank you for it.