A fiduciary financial advisor is legally and ethically bound to act in the best interests of their clients. They must be transparent and disclose potential conflicts of interest to their clients. There are several common business relationships wherein a party has a fiduciary duty toward the other party, such as trustee and beneficiary, executors and legatees, investment corporations and investors, corporate board members and shareholders, and more. If you want to avoid conflicts of interest and work with an advisor who puts
your interests first, consider hiring a fiduciary financial advisor.
This article goes over the duties and responsibilities of a fiduciary financial advisor, how to determine if an advisor is a fiduciary, and the advantages of hiring a fiduciary financial advisor.
What are the duties and responsibilities of a fiduciary financial advisor?
1. Fiduciary advisors must be honest and transparent at all times and disclose all relevant facts to their clients.
2. Fiduciary advisors must act in the best interests of their clients in all matters, whether when offering financial advice or recommending investments as per the client’s risk tolerance.
3. Fiduciary advisors must not use a client’s assets to derive personal benefit.
4. Fiduciary advisors must disclose all instances of potential conflicts of interest to their clients.
5. Fiduciary advisors must always provide correct, exhaustive, and well-researched financial advice to their clients.
How fiduciary duty differs from the suitability standard
In layman’s terms, fiduciary duty refers to actions taken in the best interests of another person or entity. Per the Investment Advisers Act of 1940, advisors must act in clients' best interests and place their interests before their own. This is true for any advisor who offers investment advice. The advisor must avoid situations that may lead to a conflict of interest.
On the other hand, the suitability standard refers to a reasonable belief on the advisor’s part that an investment made by them suits the financial needs of an investor. The advisor must ensure that transaction costs are not excessive. There is a possibility that brokers may excessively trade securities from your brokerage account to generate higher fees as they earn money from the said transactions.
It is advised that you engage the services of a fiduciary advisor who is legally obligated to look out for your best interests. It is important that you can trust the advisor to make suitable investment decisions based on your needs, goals, and risk tolerance.
How to determine if a financial advisor is a fiduciary or not
To determine if a financial advisor is a fiduciary, you may:
1. Ask for a written acknowledgment from the advisor affirming that they are a fiduciary.
2. Ask for written proof clarifying that the advisor is a Registered Investment Advisor (RIA).
3. Request a copy of a financial advisor’s Form ADV and Form CRS. Fiduciaries are mandated to register with the Securities and Exchange Commission (SEC) or a state securities regulator. The forms mentioned above contain information about the advisor’s business, educational qualifications, disciplinary record, compensation, certifications, and potential conflicts of interest. This paperwork must be filed with the SEC mandatorily. Any person can access this information online through the SEC’s Investment Advisor Public Disclosure (IAPD) tool.
4. Browse the Certified Financial Planners Board’s search tool to learn more about an advisor’s work experience and history. You can also use the National Association of Personal Financial Advisors (NAPFA’s) online search tool to find Certified Financial Planners (CFPs) near you. Note that all CFPs are fiduciaries and must adhere to the fiduciary duty standard.
5 questions to consider asking an advisor to know if they are a fiduciary
You may ask the following questions to determine whether an advisor is a fiduciary or not:
1. Are you a fiduciary?
Ask the advisor for a copy of their Form ADV. All advisors must file a Form ADV with the SEC or a state securities regulator. The advisor may not be a fiduciary if he cannot show you a copy of the form.
2. What fee model do you use to charge fees?
You can pay a fiduciary financial advisor in one of the following ways:
1. Hourly rate
2. Flat fee
3. Percentage of assets under management (AUM) with the advisor, usually between 1-2%.
You can verify the advisor’s pay structure through their Form ADV.
3. Are there any other ways you prefer to be compensated?
Some advisors use a hybrid model wherein they charge their clients an hourly rate, a flat fee, or a percentage of AUM and earn commissions from selling financial products and services. Such advisors cannot act as fiduciary financial advisors.
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Are fiduciaries generally considered more competent than other financial advisors?
Though assessing an advisor’s competence without testing their services is tricky, their past performance and disciplinary conduct can serve as a means of insight. That said, being more trustworthy does not mean that fiduciaries are more competent than non-fiduciary advisors. Both sets of advisors put in a lot of effort to attain financial expertise by clearing a rigorous set of examinations, years of study, and professional certifications and licenses. However, between the two, fiduciaries are driven to serve their client’s best interests and deliver excellent services and results.
Are robo-advisors considered to be fiduciaries?
Robo-advisors are considered fiduciaries as they are registered as investment advisors with the SEC and have a fiduciary duty to their clients. Do note robo-advisors may be unable to fully grasp the unique financial needs of their clients, as they lack empathy.
What to keep in mind when hiring a fiduciary advisor
Fiduciaries are legally obligated to always act in good faith and place their client's interests before their own. However, things do not always work out as they should. A fiduciary must avoid conflict of interest, but sometimes, a clash of interests does occur due to a fiduciary representing several clients simultaneously. Even though the fiduciary may try to be impartial and serve each client to the best of his capacity, things may not work out in the client’s favor. In such a situation, it is best to look for a different advisor who may avoid potential conflicts of interest.
What are the advantages of hiring a fiduciary financial advisor?
1. Fiduciaries are legally mandated to serve your best interests. Any recommendations made concerning investments, portfolio rebalancing, tax planning, debt management, etc., will be made keeping your interests in mind.
2. Since fiduciaries have a legal and ethical duty toward you, they are likely to be trustworthy, affording you peace of mind.
It is important to thoroughly review and evaluate prospective advisors before hiring them. Ensure that you verify the advisor’s credentials, certifications and licenses, best practices, and any instance of bad conduct on their part with a previous client. You can take legal action against your advisor if they have acted on your behalf without consulting with you first. If the said action resulted in a financial loss, the advisor can be held responsible for a breach of trust. Ensure you check whether the advisor is a fiduciary when hiring a financial advisor.
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