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What is a Fiduciary Financial Advisor?

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A fiduciary financial advisor is required by law to offer financial advice, services and financial product recommendations that are in their clients’ best interest. They must be registered with the Securities and Exchange Commission (SEC), and are ethically and legally bound to be transparent and to disclose any potential conflicts of interest to their clients, such as profiting at the client’s expense. Consider hiring a fiduciary financial advisor if you want peace of mind knowing that the financial guidance that you are being provided is to your benefit.

In this article, we will discuss more about the duties and responsibilities of a fiduciary financial advisor, and the benefits of how to identify and hire a fiduciary financial advisor:

Duties and responsibilities of a fiduciary financial advisor

Fiduciary financial advisors are legally and ethically bound by law to:

  • Be honest, transparent, and act in good faith at all times. They must present all relevant facts to their clients.
  • Ensure that they act in the best interests of their clients while offering financial advice or suggesting suitable investment instruments and products.
  • Disclose all instances of potential conflicts of interest to their clients and must actively work towards avoiding any such situations in the first place.
  • Always act in a trustworthy manner with their clients.
  • Provide correct, comprehensive, and well-researched financial advice to their clients at all times.
  • Avoid using the client’s assets for personal use or advantage.

What is the difference between fiduciary duty and the suitability standard?

As per the Investment Advisers Act of 1940, any individual or financial advisor who offers investment advice has a legal obligation to act in the best interests of their client. It is the fiduciary duty of an advisor to avoid any situations that may lead to a conflict of interest.

Conversely, financial planners and brokers that are not fiduciaries follow the suitability standard regulated by the Financial Industry Regulatory Authority (FINRA). Under the suitability standard, the advisor operates under a reasonable belief that an investment made by them suits the financial needs of an investor,  where ‘reasonable belief’ is open to interpretation. Additionally, there is a possibility that some financial advisors may push investments to achieve their sales targets or earn a higher commission that may not be suitable for your portfolio. Further, since brokers earn fees from transactions, they may excessively trade securities from your brokerage account to generate higher fees. This is also known as churning.

Therefore, you may want to engage a financial advisor that is a fiduciary whom you can trust to look out for your best interests and make investments that are beneficial to your specific financial requirements.

How to identify if a financial advisor is a fiduciary or not

To find out whether your advisor is a fiduciary or not, you can:

  • Seek a written acknowledgment from the advisor confirming that they are a fiduciary financial advisor.
  • Clarify that the advisor is an RIA or an Investment Advisor Representative and ask for written proof of the same.
  • Confirm the fee structure used by the advisor and ideally look to hire an advisor having either one or more of the following three kinds of compensation: hourly, fixed, or AUM.
  • Ensure that the advisor provides timely and accurate performance reports, a plan of action for boosting your returns for the new tax year, etc., in addition to regular financial advice.

You can find out if an advisor is a fiduciary or not through various online resources:

  • Since a fiduciary must register with the SEC or a state securities regulator, you can request a copy of a financial advisor’s Form ADV and Form CRS. These forms contain information related to the business, compensation, educational qualifications and certifications, potential conflicts of interest, and disciplinary record. This paperwork is mandatory and must be filed with the SEC. You can access this information online through SEC’s Investment Advisor Public Disclosure (IAPD) tool.
  • All Certified Financial Planners (CFP®) are fiduciaries. If you’re looking for CFP’s in your area, you can use the National Association of Personal Financial Advisors (NAPFA’s) online search tool for the same. If you wish to find out more about an advisor’s prior experience and history, look up the Certified Financial Planners Board’s search tool.

Questions to ask an advisor to know if they are a fiduciary

To determine whether an advisor is a fiduciary or not, you can ask the following questions:

1. Are you a fiduciary?

If the advisor says they are a fiduciary, request them to show you a copy of their Form ADV. The advisor must file a Form ADV with the SEC or a state regulator. However, if the advisor cannot show you the same, then he is most likely not a fiduciary RIA. You can also visit the SEC’s Investment Advisor Public Disclosure website to look for an advisor’s Form ADV.

2. How do you charge your fees?

A fiduciary financial advisor is paid directly by his client in one of the following ways:

  • On an hourly basis
  • A flat fee
  • A percentage of the total value of assets invested with the advisor, usually between 1 to 2%.

The pay structure can be verified via the advisor’s Form ADV.

3. Do you accept any alternate methods of payment?

Any alternate forms of compensation other than the ones listed above must be disclosed in Form ADV. Some advisors use a hybrid model for compensation wherein they charge a commission from the sale of financial products and either an hourly rate, a flat fee, or a percentage of AUM. These advisors cannot act as fiduciaries.

Are fiduciaries more competent compared to other financial advisors?

It is challenging to assess a financial advisor’s competence without having tested their services; however, their past performance and disciplinary conduct can offer insight. Moreover, even though fiduciary advisors may be more trustworthy compared to non-fiduciary advisors, it is not an endorsement of higher competence. An advisor has to put in a lot of effort to gain the requisite experience, education, and professional certifications. That said, fiduciaries invest their time, effort, and resources to attain financial expertise and are driven to serve their clients’ best interests to deliver excellent financial advice, services, and results.

Is a robo-advisor considered a fiduciary?

A robo-advisor is a digital advisor that provides automated, algorithm-driven financial advice and services based on the information given by you. These virtual advisors create a personalized profile of the client based on several factors such as their risk appetite. In addition, robo-advisors that are registered as investment advisors with the SEC are also inherently considered as fiduciaries. This means that they have a fiduciary duty to their clients and must act in their best interests. That said, since robo-advisors lack a human touch, they may not be able to fully comprehend the unique financial needs of clients.

Things to keep in mind when hiring a fiduciary financial advisor

Though a fiduciary is mandated to always act in good faith and place their client's interests before their own, it may not always work out that way. A fiduciary must carry out his duties with utmost diligence and avoid any instances of conflict of interest. But sometimes a clash of interest does occur. This may occur due to a fiduciary representing several clients at once, which may lead to their interests clashing with one another. The fiduciary may try to be impartial to each client but it may not end up benefiting them. Hence, it is advised that you verify the credentials of your fiduciary financial advisor, and check their past records and disciplinary history to spot any potential red flags.

Benefits of hiring a fiduciary financial advisor

There are several advantages of working with a fiduciary financial advisor:

  • Fiduciaries are legally mandated to serve your best interests, you can rest assured that their suggestions with respect to investments or when to rebalance your portfolio will be made keeping them in mind.
  • Fiduciaries are more likely to be trustworthy owing to their legal and ethical duty towards you. This affords you peace of mind and helps minimize any potential conflicts of interest that may arise in the future.

To conclude

Hiring a financial advisor is an important decision that must be made after thoroughly reviewing and assessing prospective advisors. Apart from checking and verifying the advisors' credentials, certifications, best practices, etc., you should also find out any instance of bad conduct on their part with a previous client of theirs. Furthermore, if required, you may take legal action against fiduciary advisors if they make decisions on your behalf without consulting with you first. They can be held responsible for any breach of trust that may have resulted in a financial loss for you.

At the time of hiring a financial advisor, do check whether the advisor is a fiduciary or not after conducting proper verification and vetting their credentials. You may also use the free advisor match service to get matched with 2-3 fiduciary financial advisors based on your financial requirements. All you need to do is answer a few simple questions about yourself and your financial situation, the match tool will help connect you to suitable advisors that match your financial needs.