Navigating the world of financial advice can be a bit like stepping into a labyrinth. Different titles, duties, and standards can cloud the waters and make it difficult to understand who to trust with your financial future. Two terms that often confuse people are “financial advisor” and “fiduciary advisor.”
While a financial advisor and a fiduciary advisor must both follow a code of ethics, they’re held to different legal standards of conduct that can impact the type of advice they can provide.
Navigating the world of financial advice can be a bit like stepping into a labyrinth. Different titles, duties, and standards can cloud the waters and make it difficult to understand who to trust with your financial future. Two terms that often confuse people are “financial advisor” and “fiduciary advisor.”
While a financial advisor and a fiduciary advisor must both follow a code of ethics, they’re held to different legal standards of conduct that can impact the type of advice they can provide.
By understanding the key differences between fiduciary financial advisors and other types of financial professionals, you can make more informed decisions. Remember, your financial well-being is at the heart of these standards of conduct.
It might come as no surprise that this topic is near and dear to me! So let’s demystify these terms, explain the key differences, and outline how to find a fiduciary financial advisor.
What is a Fiduciary Financial Advisor?
As the name implies, a fiduciary financial advisor (or simply, a “fiduciary”) operates under the fiduciary standard. This means they are legally obligated to act in the best interests of their clients. They are required to prioritize your needs over their own.
A fiduciary must also actively avoid potential conflicts of interest and always provide clients with transparent, clear, and concise information about their investments. This includes the duty to disclose any fees they charge and present all options available.
Fiduciary advisors typically offer a wider selection of investment options because their primary goal is to keep their client’s best interest in mind, not to sell a particular product. For instance, even if they use model portfolios, they might still prefer to completely customize each portfolio to match their client’s best interest. This distinction can make all the difference in crafting a well-rounded, flexible financial plan.
How Does a Fiduciary Differ from a Financial Advisor?
At first glance, “fiduciary” and “financial advisor” might appear interchangeable. After all, isn’t a financial advisor also supposed to act in your best interest? The key difference lies in the standards they are required to adhere to.
“Financial advisor” is a blanket term encompassing various types of advisors. They can all offer advice on how to invest your money and provide regular financial checkups. Some of these advisors are fiduciaries, while others are not. Knowing this distinction is crucial as a consumer, as the type of advisor you hire will significantly impact the advice you receive.
For instance, some financial advisors operate under a Broker Dealer, earning commissions instead of fees. They are held to a regulatory standard known as “suitability.” Under the suitability standard, the financial advisor is not a fiduciary and only needs to consider whether the investment product they are selling suits the client, reflecting the client’s risk tolerance and time horizon. Critics argue that this standard leaves room for conflicts of interest.
Working with a fiduciary advisor offers the confidence that your financial advisor will always act in your best interest with their advice. However, financial advisors employed by insurance companies or broker-dealers may have a limited product scope they can offer clients, which could be a disadvantage for you as a client.
Verifying Your Advisor’s Fiduciary Status
So how can you ascertain if your financial advisor is indeed a fiduciary? It’s not as complicated as it might sound. The most direct way is to ask them outright. However, it’s also advisable to verify the information they provide.
You can do this by visiting FINRA’s Broker Check website, which maintains a database of licensed financial advisors. You can also check which regulatory agency your advisor is registered with—advisors registered with the SEC or a State will typically be held to a fiduciary standard.
Another way to ensure that your advisor acts as a fiduciary is to hire a Registered Investment Advisor (RIA). RIAs are regulated by the SEC or state securities regulators and are held to the fiduciary standard. Additionally, Certified Financial Planners (CFP) are required to follow the fiduciary standard.
Lastly, you can ask your advisor for their “Fiduciary Disclosure,” which they must provide to clients.
Weighing the Costs: Fiduciary vs. Financial Advisor
When it comes to costs, there is no straightforward answer. Every advisor can charge their fees differently. Some may charge a management fee that is a percentage of the assets they manage, while others may charge a retainer or hourly fee. There isn’t typically a price difference between fiduciary and non-fiduciary advisors, but how the advisor is compensated could affect the price you end up paying.
Regardless of the specific structure, understanding how your financial professional charges for their services is essential to the decision-making process. Always ask for a clear explanation of any fees to avoid unpleasant surprises.
Breach of Fiduciary Duty
A fundamental cornerstone of fiduciary relationships is the advisor’s responsibility to always act in their client’s best interests. When a fiduciary advisor fails to meet this high standard, they may be guilty of a breach of fiduciary duty. Such an infraction can have severe consequences, both for the client and the advisor. It can mean significant financial loss or missed investment opportunities for the client. For the advisor, a breach can lead to legal repercussions, registration loss, and reputation damage.
In contrast, a financial advisor operating under the suitability standard does not face such legal obligations. They must ensure that their investment advice suits the client’s risk tolerance and financial goals.
Finding a Fiduciary Financial Advisor
Now that you understand what a fiduciary financial advisor is and the benefits they offer, you might wonder how to seek one out. Of course, a quick internet search can help you find fiduciaries near you. But to find the fiduciary best suited to you, you might consider taking a few extra steps:
1. Identify Your Financial Goals
Before you start your search, it’s essential to understand your financial goals. Are you planning for retirement, seeking to grow your wealth, or protecting your assets for future generations? Identifying your financial objectives will help you choose an advisor who specializes in areas relevant to your goals.
2. Use Online Directories
Once you have a clear idea of what you want, use online directories to find fiduciary financial advisors. In addition to the resources mentioned above, the National Association of Personal Financial Advisors (NAPFA) and the Certified Financial Planner Board of Standards (CFP Board) can help.
3. Look at Their Credentials
A fiduciary financial advisor often holds specific credentials, such as CFP or Chartered Financial Analyst (CFA). These credentials indicate they have undergone rigorous testing and adhere to high ethical standards, including acting as a fiduciary.
4. Ask the Right Questions
When you meet with potential advisors, asking the right questions is essential. Consider asking them questions about their:
- Registration Status
- Code of Ethics and legal standards
- Compensation structures
- Fees
5. Verify with Regulatory Agencies
As mentioned above, review online resources to double-check their status. While I don’t expect your chosen financial advisor to lie, it’s easy enough to check upfront before you relinquish control of your financial future.
