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What is a Fiduciary and Why it is Important You Work With One

| October 15, 2020
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Why You Should be Working with a Fiduciary

There’s plenty of financial jargon that you don’t need to know in order to succeed financially. But one term that is essential to your money and how it is handled is the word fiduciary. The concept can seem confusing to people, as many assume that all advisors, whether they’re stockbrokers or financial planners, are required to act in their client’s best interest. But that’s not the reality. It’s important to understand the distinction between different types of advisors’ roles and what it means for you and your money.

FIDUCIARY, DEFINED

Fiduciary financial advisors are legally and ethically required to act in their clients’ best interests (monitored by the SEC). They have a duty to be loyal to their clients and ensure they disclose any potential conflicts of interest that may come up. Any advice they give is based on the client’s financial situation and investment goals.

A fiduciary advisor can’t, for example, suggest you buy a security that will pay them a commission but not benefit you. Their number-one priority is giving you advice that strives to help you reach your financial goals. 

Choosing a fiduciary financial advisor means that you should not be misled or mistreated. It means you have a professional in your corner rooting you on as you journey toward financial security.

HOW DO I KNOW IF MY ADVISOR IS A FIDUCIARY?

While some advisors may toss around the term lightly, not all advisors are fiduciaries. Wall Street brokerage firms can sell proprietary products, so their advice may potentially still be biased. Additionally, while brokers must inform clients that they’re choosing to be paid commissions, if the investor neglects to read the email notification, they won’t know where their broker’s interests lie. 

While it can seem confusing to sort out all these titles, it’s worth it to make sure your advisor is working in your best interest. If you’re not sure that your advisor follows the fiduciary standard, ask them these three questions. 

  1. ARE YOU A FIDUCIARY ADVISOR? 

Let’s start with the most obvious question. Yes, you can ask an advisor if they’re a fiduciary! A fiduciary advisor should have proof they’ve signed a Fiduciary Oath, which declares an advisor’s commitment to a fiduciary code of ethics. They should also provide you with a copy of their Form ADV Part 2, which discloses their obligations as a fiduciary advisor.

  1. HOW DO YOU GET PAID? 

Financial advisors get paid all types of ways—from flat hourly rates down to a combination of fees and commissions. There’s nothing inherently wrong with any of these payment methods, but many fiduciary advisors are fee-only. This minimizes conflicts and ensures that your financial planner acts in your best interest.

  1. WHAT’S YOUR FINANCIAL PLANNING PROCESS LIKE? 

A fiduciary advisor asks questions and gets to know your financial goals before they ever make investment recommendations. They know that a good look at your entire financial picture is paramount to your long-term success. So, ask your advisor to describe their financial planning process. If it doesn’t start with you, keep looking.  

What if my Advisor isn’t a Fiduciary?

Non fiduciary advisors include (but are not limited to) insurance agents, stockbrokers, and broker-dealers.  They are responsible for meeting a new ‘Best Interest’ rule issued by the SEC.  Under the Best Interest rule, non-fiduciary advisors are not required to put their own interests ahead of their clients. Potential conflicts of interest aren’t prohibited but they must be disclosed. In practical terms however, non-fiduciary advisors can still sell proprietary products or more expensive investments, as long as they can justify it is in your best interest. Additionally, once an investment has been made, the non-fiduciary advisor is not obligated to monitor it’s suitability over time. The Best Interest rule falls short of the Fiduciary standard.

 

DO I NEED A FIDUCIARY?

If you want to feel confident and empowered to make the best decisions for yourself and your finances, the answer is yes. Fiduciary advisors are open and transparent and act as your advocate as you navigate your financial journey.

At Hyre Personal Wealth Advisors, we pride ourselves on being investment fiduciaries. Whether you’re looking for an advisor for the first time or have been burned by bad financial advice in the past, we’re here to help you create a solid plan that helps you pursue your goals. To get started, just give us a call at 614-225-9400.

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