What is a Fiduciary and Why it is Important You Work With One?
There’s plenty of financial jargon that you don’t need to know for financial success. 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. Many assume that all advisors, whether they’re stockbrokers or financial planners, are required to legally 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.
Financial advisors acting in a fiduciary capacity are legally and ethically required to act in their clients’ best interests. 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 and must be in the client's best interest.
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 will help prevent you from 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 that benefit the firm and the advisor, so their advice may potentially be biased. 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! They should be able to give an unequivocal “yes” and put it in writing. Anything less should be considered a red flag. They should also provide you with a copy of their Form ADV Part 2, which discloses their obligations as a fiduciary advisor.
2. 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 may help minimize conflicts and ensures that your financial planner acts in your best interest.
3. What is 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, financial advisors not acting in a fiduciary capacity are not obligated to put their clients' best interests ahead of their own. 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 in some way. 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.
When you are interviewing potential financial advisors, make sure to discuss whether they will serve as fiduciaries to you. If they won’t, they may face conflicts of interest that won’t serve you long term.
While there are many different types of financial advisors out there, not all of them are legally required to put your best interests first. At Hyre Personal Wealth Advisors, we pride ourselves on offering solutions that have been thoroughly considered based on the individual client.
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