Finances are hard. Markets are inconsistent, stocks fluctuate, and personal crises never stop happening altogether; advisors know this, clients feel this, and everybody could use a little help, if it’s in their budget. Many people are not equipped with the legal or financial know-how to manage investments, retirement and college funds, insurance and assets alone – and that’s okay. For those moments when the difficulty of finance catches up to you, it might be helpful to seek out the help of a fiduciary financial advisor.
But what is a fiduciary? How do you know if an advisor is fiduciary and what can you expect while working with one? In this article, we’ll answer these questions and more to give you some of the help you might need in navigating the world of finance.
A fiduciary financial advisor is someone who is legally and ethically required to work in the best interests of their clients. Their responsibilities are similar, if not the same as, those of a financial advisor, however their status as a fiduciary changes the implications of their actions. There are consequences if a fiduciary breaches their duty of acting in their clients’ best interest.
The fiduciary rule ensures that financial advisors and their firms provide their clients with the same advice and expertise they would provide to themselves. This includes the best prices and terms as well as the relevant facts and education to keep clients informed about their assets.
The suitability standard, which is the standard for non-fiduciary advisors, only requires financial professionals to offer products and services suitable for their clients. This does not necessarily consider the client's best interest, but merely whether or not a financial product is appropriate for the client’s situation.
Fiduciaries have two main duties while managing money:
Duty of care. Under this requirement, fiduciaries must review all available information about your financial life before making recommendations or plans. This ensures that they are making informed decisions that are in your best interests.
Duty of loyalty. This is a requirement that a fiduciary not use their position to further their interests. For example, they should not recommend financial products that they may receive a commission form especially if it is not in the best interest of the client.
Almost anyone can act as a fiduciary because, technically, all you need to do is act in the best interest of another. However, there are legal obligations associated with being a fiduciary advisor - especially concerning delicate topics such as finances - that are based upon trust law. The professional, who must adhere to fiduciary principles, acts as a trustee, and the client as the trustor. The fiduciary standard is the highest legal obligation that one can have to another person. Ideally, fiduciary practices make the professional worthy of clients' trust.
Some examples of a breach of fiduciary duty include:
Making an exorbitant number of trades to make commissions (account churning)
Exchanging investments without permission
Using a client account to purchase stocks for oneself
Not communicating conflicts of interest linked with investments
Misrepresentation, or making an untrue statement about a transaction.
When financial advisors break their fiduciary duty, they can be subject to civil liability and professional disciplinary sanctions. This could involve a suspension from practice, or the advisor might be barred from the industry.
No, not all financial advisors are fiduciaries. The financial advisors who work for brokerage firms in particular aren’t typically fiduciaries. Fiduciary financial advisors typically work for Registered Investment Advisors, or RIAs. They can also be certified financial planners (CFPs), but you should always double-check with your advisor before working with them.
An RIA is a company or individual financial advisor - or any advising group with employee ranges between these - that provides their clients with financial advice. Unlike many other financial advisors, RIAs have to act under fiduciary duty. This is because they are either registered with the Securities and Exchange Commission (SEC) or state securities regulators. RIAs often offer more than just financial advice; they can also help plan for retirement, find insurance plans, or assist in organizing your estate. Introductory consultations are generally free, and you can discuss payment options - hourly, flat monthly, one-time yearly, assets/ income fee - in this initial discussion.
An investment advisor representative, or IAR, is a financial professional that works under the umbrella of an RIA. IARs are one type of fiduciary financial advisor that require certain accolades to practice. To become an IAR, an individual must either pass the Series 65 exam or pass both the Series 7 and Series 66 exams. In some states, you may be able to use a professional designation, such as certified financial planner (CFP) or chartered financial analyst (CFA), instead of passing the Series 65. It's important to note that not all CFPs and CFAs are IARs - and not all IARs are CFPs or CFAs. Ideally, for the most comprehensive guidance, find someone who has both an IAR and CFP.
Before looking into possible fiduciary financial advisors, you need to determine what specific help you need and your ideal payment range that works with your financial situation. When you first meet, you’ll need to be able to sit down and explain your needs. Those needs will depend on your situation: children, debt, and taxes will all make your financial life more complex. It might be helpful to hire an advisor if:
You recently inherited money or assets
You want to begin investing
Your employer offers a 401(k) and you want to compare options
You need to re-manage your assets (like after a divorce)
You are considering starting or restructuring a small business
You are approaching retirement
You want long-term management advice for a house or other investment
You want to create a trust fund or begin estate planning
You need to help a close relative with their finances
You need a second opinion on your financial habits and investments
You want to create a college or medical fund for a dependent
Some services a fiduciary financial advisor might offer include:
Reviewing your current financial situation
Discussing future financial goals and mapping possible routes to those goals
Creating investment or retirement accounts on your behalf
Buying or selling investments on your behalf
Developing a plan to manage long-term expenses (ie college funds or retirement accounts)
Providing advice on financial obstacles or hardships
Assisting in estate planning
Determining the best life insurance
Many fiduciary advisors are available for one-time or short-term consultations, while others specialize in full-time advising. Determine what you want to accomplish with a fiduciary financial advisor and research qualified providers in your area. Consider meeting with a few different advisors before deciding who to work with. Always ask questions about the fee structure and overall services.
Just ask! In your first meeting with a potential advisor, be sure to clarify, firstly, if they are a fiduciary and, secondly, if they are always acting as a fiduciary. The biggest risk in advising is less about not having fiduciary status and more about trusting the wrong advisor. Trust your gut about whether or not you think an advisor will work for you and be sure to find someone who is competent and ethical.
Other questions to ask financial advisors in a first meeting:
What are your credentials, licenses, and/or certifications?
How much experience do you have?
Are you a fiduciary? Can you describe when you are acting as a fiduciary and when you are not? Why are you not a fiduciary in some instances?
What is your fee structure?
Can you describe all the costs I will pay you and your firm?
What is your investment philosophy? This includes risk tolerance and investing style (ie value or growth oriented).
Is your portfolio adequately diversified?
Are you a CFP professional or CFA charterholder?
What are the most important aspects of investments and building, or maintaining, long-term wealth?
What role does insurance play in a financial plan?
A robo-advisor is an automated software system that uses algorithms to build and manage portfolios for clients. Many robo-advisors are registered as advisors with the Securities and Exchange Commission (SEC), which means they have a fiduciary duty to their clients.
However, since robo-advisors are automated systems, some financial professionals argue that they’re unable to be considered fiduciaries. They have less insight into a customer’s unique personal situation and can fail to take into account a client’s investment objectives and risk tolerance, so it can be hard to determine if they’re recommending the best possible investment plan or products. If you opt to use a robo-advisor, keep those caveats in mind.
Fiduciary responsibility is important because it ensures that the person managing your money is also making the best choices for you in terms of products and fees. While this may feel like a lot of information, it’s important to be as informed as possible when managing something as delicate as your finances.
The asset-management professionals at Strategic Investment Management can help you develop a sound strategy that prioritizes giving you the financial insight at our disposal.
Schedule an appointment with us to learn more!