Understanding the benefits of having a fiduciary advisor
Imagine you are about to retire. You have diligently saved for decades, and are finally ready to enjoy your golden years. Then, you meet with a financial advisor who tells you that you have far less money than you thought—and should you want to maintain your current lifestyle, you will need to make some major changes. Choosing a financial advisor is a big decision, and selecting one should not be taken lightly.
Before entrusting someone with your life savings, it is important to do your homework and choose an advisor who is qualified and who will always put your best interests first. After all, this person will be responsible for helping you make major financial decisions. While it’s true you can find a lot of helpful information online these days, there’s also a lot of misinformation out there. So, how do you know if you’re getting good advice?
Understanding the different types of financial advisors, the differences between a typical advisor and a fiduciary advisor, how to find the right advisor for you, as well as how to determine whether an advisor is acting in your best interest can help you make the best decisions for you and your financial future.
Types of Financial Advisors
When it comes to financial advice, there are plenty of financial professionals available. Determining which type of advisor is best suited for your individual needs can prove challenging. That’s why the first step to navigating the landscape is to understand the different types of financial advisors and what they can do for you.
Independent Financial Advisors
Independent financial advisors are not affiliated with any one particular financial institution. This allows them to offer unbiased advice and product recommendations. And because they’re not beholden to any one company, they’re free to offer a wider range of products and services. However, this also means independent financial advisors are typically more expensive than other types of advisors.
Bank-affiliated advisors are, as their name implies, affiliated with a particular bank or credit union. While this affiliation gives them access to a limited range of products, it also allows them to offer lower fees than independent advisors. In addition, bank-affiliated advisors typically have a good understanding of the products offered by their employer, which can be helpful if you need specific advice about a banking product.
Commission-based advisors earn commissions on the products they sell to their clients. This type of compensation arrangement can create conflicts of interest, as the advisor may be tempted to recommend products that aren’t in the best interests of the client in order to earn a higher commission. Something to keep in mind when considering a commission-based advisor is they do not have a legal duty to their clients. Instead, they have a duty to their employer and they do not have to disclose conflicts of interest that may arise when a client’s interests clash with those compensating the advisor.
Fee-only advisors are paid entirely by their clients—they don’t receive commissions or kickbacks from the sale of any products. This arrangement aligns the interests of the advisor and the client, as both parties benefit when the client’s investments succeed. While fee-only advisors are often more expensive than other types of advisors, fee-only advisors are generally considered to be more objective than commission-based advisors since they do not have a financial incentive to sell certain products over others.
Registered Investment Advisor
A Registered Investment Advisor (RIA) is a financial professional who provides advice and guidance to clients regarding investments, asset allocation, and other financial matters. RIAs are held to a fiduciary standard. This is a higher standard of care than other financial advisors, and they must pass a rigorous examination to earn their credentials. RIAs must also adhere to a strict code of ethics and maintain a clean record with the Securities and Exchange Commission. The RIA credential is granted by the Financial Industry Regulatory Authority (FINRA) and as of 2021, a little more than 14,800 RIA’s held the designation in the United States.
Holding the RIA credential signifies an advisor has met a high standard of education and experience and is committed to acting in their client’s best interests. Registered Investment Advisors provide an important service to individuals and families who are seeking guidance in navigating the complex world of investing.
Certified Financial Advisor
Certified financial advisors are professionals who help people manage their money. They may work with individuals or businesses, providing advice on topics like investing, saving for retirement, and budgeting. The CFA credential is a designation given by the Certified Financial Analyst Institute, indicating that an advisor has met certain standards of education and experience. To earn the CFA, candidates must pass three exams covering topics such as ethics, investment analysis, and portfolio management.
The credential is considered one of the highest standards in the financial advising industry, and CFAs are held to a strict code of ethics. Certified financial advisors can provide valuable guidance on how to best manage your finances.
Certified Financial Planner
A Certified Financial Planner (CFP) is a professional who helps clients plan for their financial future. CFPs work with clients to assess their current financial situation, set goals, and develop a plan to reach those goals. The CFP credential is granted by the Certified Financial Planner Board of Standards, Inc. and requires completing a rigorous education and examination process. CFPs must also adhere to strict ethical standards and complete continuing education requirements on an ongoing basis. In fact, CFPs are bound to the fiduciary standard by the Code of Conduct of the National Association of Personal Financial Advisors (NAPFA)
There are many more designations and roles financial professionals can hold. In fact, some hold multiple designations. This comprehensive list of designations can help to further educate you on designations a potential advisor may hold and how they may or may not help to protect your portfolio.
The Importance of Fiduciary Advisors
A fiduciary is an individual or institution who manages money or property for another person and is legally bound to do so in the other person’s best interest. The term “fiduciary” comes from the Latin word fiducia, which means trust. When it comes to financial planning, this means your fiduciary must always put your needs first. They cannot make any decisions that would result in them making a profit at your expense.
When a financial professional is not a fiduciary they are not legally obligated to have your best interests at heart. If you want to ensure your financial professional is working to the best of their ability to assist you in your investments, hiring a financial advisor who is a fiduciary is something you’ll want to strongly consider. It can help to give you peace of mind knowing the person handling your money is required by law to act in your best interests, rather than their own.
Difference Between a Fiduciary and a Financial Advisor
The main difference between a fiduciary and a non-fiduciary financial advisor is the certification that binds a fiduciary to legally always act in the best interest of the client. A financial advisor only has to recommend suitable investments. In addition, fiduciaries are subject to stricter rules and regulations than financial advisors.
The Role of a Fiduciary
A fiduciary has several duties to their clients, including duty of loyalty and duty of care. The duty of loyalty requires the fiduciary to always put the client’s interests ahead of their own. While duty of care requires the fiduciary to use due diligence when making decisions on behalf of their client. Simply put, a fiduciary must research all options and choose the one that is best for their client.
So what does this mean for you? It means a fiduciary advisor should only provide counsel and recommendations after careful consideration of what is best for you and your unique circumstances. They must take into account your goals, risk tolerance, and time horizon when creating a personal investment plan and should monitor your account and make adjustments as needed. After all, their goal should be to help you reach your financial goals.
You can also expect them to:
- Provide objective advice. Fiduciary financial advisors are required by law to provide unbiased advice that is in your best interest. They cannot receive commissions or kickbacks for selling certain products.
- Act with care, competence, and diligence. These individuals must also have the knowledge and experience necessary to provide competent advice. They must keep up with changes in the marketplace so they can provide accurate and up-to-date advice.
- Put your interests first. As emphasized above, having someone who acts in your interests ahead of their own is a critical role for a fiduciary advisor. This can include recommending only those products most suitable for you based on your unique circumstances or financial goals.
- Disclose all material facts. Understanding all the facts about potential investments, including any risks involved, is important for any investor. Knowing you have a financial professional who cannot withhold any information that could potentially impact your decision-making can be a relief and help you make better-educated decisions about your portfolio.
Finding a Fiduciary Financial Planner
So you’re ready to find a good fiduciary financial planner, what do you do first? Research. Spend time online reading reviews and testimonials from other clients and making sure any financial professional you’re considering is registered with the U.S. Securities and Exchange Commission (SEC). Some fiduciaries are also only registered at the state level. You can also find information on registration for people and firms on the SEC site.
Viewing the websites of multiple financial planning firms to get a better sense of their culture, services, and fees is another step you can take in doing research. Once you’ve narrowed down your list of potential planners, schedule an initial consultation with each one. This will allow you to ask questions and get a feel for the planner’s personality and style.
During the consultation, be sure to ask about their experience working with clients in your situation. For example, if you’re nearing retirement, you’ll want to make sure they have experience helping clients navigate getting ready to retire, paying off final debts, and having enough money to live the lifestyle they want to live during retirement. Tools like Simplicitree, an interactive planning experience, can map out the financial journey for investors and empower them to create a successful financial future.
You should also inquire about the type of investment products the planner recommends and ask for an explanation of any fees the planner charges.
Below is a comprehensive list of questions you can ask during the consultation:
- What are your qualifications?
- How long have you been working as a financial planner?
- What’s your experience working with clients in my situation?
- Do you have any designations or certifications?
- Are you a registered investment advisor (RIA)?
- How do you charge for your services?
- What type of relationship do you develop with your clients?
- How often do we need to meet?
- What should I expect from our working relationship?
- Have you ever been disciplined by a regulatory body or the court system?
- Who will be responsible for implementing my financial plan?
- What happens if we decide to terminate our relationship?
- Are you a fiduciary?
Handling a Lack of Fiduciary Integrity
Despite all of your best efforts, you may still find yourself in a situation where you don’t feel your advisor is meeting their fiduciary duties. If this happens, there are a few things you can do. First, have a conversation with your advisor about your concerns and see if they can explain the recent decline in your account value. If they can’t, or if their explanation doesn’t make sense, it might be time to look for a new advisor.
You should also take a close look at your investment portfolio to see if there have been any changes that could explain the decline in value. If you see anything that looks out of place, or if you don’t understand why a particular investment was made, don’t hesitate to ask questions. Remember, it’s your money and you have a right to know how it’s being invested.
The Bottom Line
When choosing a financial advisor, it’s important to do the necessary homework. First, consider your individual needs and objectives. There is no one-size-fits-all solution—the best type of advisor for you will depend on your unique circumstances. Conduct research and find an advisor that you feel will honor their fiduciary duty.
Don’t shy away from asking questions. You’ve worked hard for your money and your financial future is on the line. It’s up to you to make sure you are completely comfortable with an advisor, their qualifications, and their track record before making a decision. Lastly, track your portfolio performance and be aware of any red flags that may indicate that your advisor is acting in their best interest rather than your own.