What is a Fiduciary Advisor: Roles and Benefits
A fiduciary is a person who acts on behalf of their client with a moral duty to preserve their trust and put the clients’ interests ahead of their own. In the world of finance, a financial advisor who is a fiduciary is registered with the U.S. Securities and Exchange Commission (SEC), or any state securities regulator, and has a legal and ethical obligation to act in the best interest of their client. In other words, they are legally bound to keep their loyalty and integrity with the client and not their employer (such as brokerage houses or fund houses). Fiduciary financial advisors pick out the best-fit products for their client’s portfolio after careful analysis and place the client’s financial goals for wealth generation above their own earnings.
In this article, we shall focus on the important things that you need to know about fiduciaries and their duties, and why it is beneficial for you to hire a fiduciary financial advisor for receiving the best financial advice.
Why do I Need a Financial Fiduciary?
Choosing a financial advisor is an important decision, as the money decisions you will make will impact your future lifestyle. When selecting a financial professional, many people assume that the advisor will automatically act in the client’s best interest. This is unfortunately, not the case. In many instances, financial advisors are incentivized to sell various products to their clients, regardless of whether those products serve their clients’ best interests.
However, where financial fiduciaries are concerned, they are legally bound to serve in your best interest. For example, a Registered Investment Advisor (RIA) does not sell specific products to their clients, but instead offers financial advice and solutions. In doing so, he or she acts from a fiduciary capacity, placing the clients’ interests above all else.
What are the Duties of a Fiduciary Advisor?
A fiduciary advisor’s duty is both legal and ethical in nature. Within their role, they must ensure the following:
- Put their clients’ best interests before their own, while recommending the most suitable financial solutions and products.
- Act in good faith, be transparent, and provide all relevant facts to clients.
- Provide the client with undivided loyalty
- Avoid conflicts of interest, and disclose any potential conflicts of interest to clients.
- Ensure to the best of their ability that any advice provided is accurate and thorough.
- Avoid using a client’s assets to benefit themselves. For example: buying securities for their own account before buying them for a client.
Fiduciary duties are normally present for the following types of advisory relationships:
- Trustee and beneficiary
- Corporate board members and shareholders
- Executors and legatees
- Guardians and wards
- Promoters and stock subscribers
- Investment corporations and investors
- Insurance companies or agents and policyholders
What’s the Difference Between Fiduciary Duty and Suitability Standards?
The Investment Advisers Act of 1940 states that a financial expert or advisor (or anyone in the business of giving investment advice) has a fiduciary duty towards their client, a requirement that fiduciary advisors act in the best interest of their client. This means that fiduciaries cannot have a conflict of interest, cannot earn commission from recommendation and sale of investment products, and need to place the interests of the client above his or her own preferences. The neutrality in opinion of a financial fiduciary while recommending financial products sets the bar high among financial advisors. This is the fiduciary duty that registered fiduciary advisors are mandated to deliver through their services.
Financial planners and brokers, on the other hand, are not governed by a uniform standard of service or legally bound by fiduciary duty. Instead, they follow what is called a suitability standard. Set by the Financial Industry Regulatory Authority (FINRA), it is a requirement wherein the advisor must have a reasonable belief that an investment, transaction, or frequency of transactions is suitable for the customer. Many find ‘reasonable belief’ to be ambiguous and leverage it in different ways. It is noteworthy that brokers may earn commissions from sales of financial products. Therefore there is a chance that they push investments in order to meet their sales targets that may not necessarily be the best-fit for your portfolio. Brokers also earn fees from transactions, and they may churn portfolios freely under the suitability standard of service delivery.
Hence, hiring a fiduciary financial advisor, who delivers his fiduciary duties diligently, for your financial needs can give you the assurance that your investments are made in a manner that is most beneficial to you.
Benefits of Working With a Fiduciary Financial Advisor
- Fiduciary financial advisors know the best ways to administer your finances with the highest standard of care. You can therefore have the confidence that your money will be in the good hands of someone who has your goodwill at the centre of their operations. Hence, you will have peace of mind, and may rest assured that an investment product or an investment recommendation that they made for you will be in your favor.
- You get to engage with a trustworthy professional who is legally bound not to have a conflict of interest in meeting your financial needs and goals. They are mandated to put your interests above their own when providing advisory services to you.
- They go through rigorous training and certification, hold higher levels of qualifications and have years of experience to provide the best of service to you. They also have easy access to additional resources, such as portfolio managers, who can help with increasing the returns on your investments.
Do Fiduciary Advisors Produce Better Results?
It is challenging to measure a financial advisor’s competence, ethics, and past performance. A fiduciary financial advisor may be more trustworthy than a non-fiduciary financial advisor, but not necessarily more competent. Competence is a function of experience, education and legitimate certifications that have substantial curriculums, proctored examinations and continuing education. Some experts suggest that at least 35% of the 260 certifications and designations that are used by advisors are likely fake.
Learn more about a financial advisor’s credentials for free using Paladin’s “Check a Credential” tool.
That said, fiduciaries are financial advisors that do what is best for their clients. Taking their profession seriously is what motivates them to commit the extraordinary amount of time it takes to be a real financial expert. And, it is this expertise that enables them to deliver superior financial advice, services and results.
How do I Know if my Financial Advisor is a Fiduciary?
- Obtain written acknowledgement that the advisor is acting in a fiduciary capacity when providing financial advice and services to you.
- Make sure the advisor is a Registered Investment Advisor or an Investment Advisor Representative. Ask for written verification.
- Make sure the advisor is compensated only with one or more of the three types of fees: Hourly, fixed, or asset-based (% of assets).
- Make sure the advisor provides ongoing advice and services – for example performance measurement reports.
There are many resources available that can help you know if an advisor operates as a fiduciary:
- All investment advisors registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator must act as fiduciaries. You can request a copy of a financial advisor’s Form ADV and Form CRS, which is the paperwork the SEC requires advisory firms to file. This will give you information about an advisor’s business, pay structure, educational background, potential conflicts of interest, and disciplinary history. You can also look up this information online through the SEC’s Investment Advisor Public Disclosure (IAPD) tool.
- The National Association of Personal Financial Advisors (NAPFA) has an online search tool that makes it easy to find certified financial planners in your area. In addition to this, the Certified Financial Planners Board has a search tool as well. You can use it to read up on a particular advisor and evaluate their experience and history.
- You may directly approach your financial advisor and ask them if they are a fiduciary, and get this answered in writing.
Use Paladin’s free credentials tool to understand the credentials that your financial advisor holds and to know whether your advisor holds the best credentials. Paladin Registry is also a good resource for finding fiduciaries in your area with experience handling portfolios. Use the free matching tool to find fiduciaries and evaluate them by interviewing them to check their suitability before engaging them.
Questions to ask an Advisor to Find out if They are a Fiduciary
When you first speak with an advisor, the first few questions you should ask are as follows:
1) Are you a fiduciary?
The answer is either a “yes’” or a “no.” If the advisor answers “yes,” ask to see a copy of his Form ADV. Form ADV is a uniform form used by investment advisors to register with the SEC and state securities agencies.
If the advisor won’t or can’t provide you with a copy of his Form ADV, he is probably not a fiduciary RIA. You can also see a copy of an advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure website.
2) How are you compensated?
True fiduciary advisors are only compensated with fees paid directly by their clients. The fee is generally a percentage of the amount invested with the advisor, typically around 1%. They might also charge a flat fee for advice and some charge an hourly fee. You can verify their compensation in their Form ADV.
3) Do you accept any other forms of compensation?
A true fiduciary advisor does not accept any other forms of compensation, especially from third-party providers. If they do, it must be disclosed in their Form ADV. Some fiduciaries work on a hybrid model where they are part time fiduciaries and accept commission from sale of products. They are allowed to sell only when they are not acting as a fiduciary which must be informed beforehand. Such details are also disclosed in the Form ADV.
How much does a Fiduciary Financial Advisor Cost?
Financial advisors are generally compensated in one of these three ways: fees, commissions, or a combination of the two.
Fee-only advisors have either a flat or hourly rate, on a per-service basis or as a percentage of assets under management. An important point to note is that they do not earn commissions on trading fees so their compensation is not in conflict with the investments they recommend. Fiduciaries must be fee-only or fee-based.
A Word of Caution Before Working with a Fiduciary Financial Advisor
A fiduciary is synonymous with the duty of care and the duty to act in good faith while being loyal. However, not all fiduciaries function equally. While a fiduciary is supposed to administer the highest standard of care, multiple fiduciary duties and interests might sometimes be in conflict with one another. This situation generally arises when one fiduciary represents more than one client and the interests of those clients conflict. Balancing the interests might not be in the best favor of either clients, or acceptable to equity. Hence, it is highly advisable that you conduct a rigorous vetting process to identify troublesome parameters, checking to see if the advisor has followed the compliance of best practices without a problem in his past.
To sum it up
Fiduciaries are legally and morally bound to serve in your best interest. They can be held responsible and taken to the court if they make decisions without consulting you on any investments with regard to your financial plans. At the end of the day, your decision to hire a financial advisor should be based on proper verification, by finding out more about the advisors credentials, best practices, etc., and by ensuring that your interests will be safeguarded at all times.
Paladin Registry’s free matching tool can help you find fiduciaries near you. Answer a few simple questions and get matched with verified financial advisors, skilled to help you manage your finances and grow your wealth.