What Is A Fiduciary? Why Should It Matter For Investing And How Can You Know If Your Advisor Is One?

 What Is A Fiduciary? Why Should It Matter For Investing And How Can You know If Your Advisor Is One?      

By: Robert Schneeweis, Chief Executive Officer

By definition, a fiduciary is a person or organization that acts on behalf of another person or persons to manage assets. Essentially, a fiduciary owes to that other entity the duties of good faith and trust. The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other’s best interests.

This term “fiduciary” is a very good thing to hear if you’re searching for a financial advisor. It means the advisor is “legally required” to put your interests first, rather than enhancing their compensation. Fiduciary duty eliminates conflict of interest concerns which makes advice more trustworthy. Not all financial advisors are fiduciaries. All investment advisors registered with the SEC or a State securities regulator (Registered Investment Advisors or RIA) must act as fiduciaries. Broker-dealers, stockbrokers and insurance agents are only required to fulfill a “suitability obligation”. This means that while the advice they give you may be suitable to your situation; they may substitute a higher cost product that pays them more for a similar product that better aligns with your interest at a lower cost. This same conflict exists – albeit in a less visible way – with a group of advisors known as “Hybrid” advisors. These advisors work for large firms that offer both “fee-based” services and brokerage services and manage some of your money on a Fee-based basis but also put some of your money in products where they receive a commission. Fee-only advisors are sometimes seen as operating with less of a structural conflict of interest than brokers or other advisors who earn commission, which can vary from one product to another. However, in that mode, the advisor might have the incentive to engage in excessive trading activity or favor a specific investment that will net the largest commission or fee.

What about automated / on-line or “Robo-Advisors” which advertise as RIAs? They insist that they are fiduciaries. They are registered investment advisors, but are they fiduciaries? They typically only offer advice based on a relatively short risk questionnaire, but rarely get a full financial picture or understanding of goals. An back and forth discussion of goals and attitudes toward risk seems critical to providing fiduciary services and cannot be adequately addressed by checking a few boxes.

Choosing a fiduciary financial advisor can give you greater peace of mind. With a fiduciary financial advisor, you’ll know that the person managing your money is legally obligated to make decisions in your best interest. While non-fiduciary advisors are not necessarily bad actors, it’s easier to ensure that you’re working with someone who has your best interest at heart if you opt to work with a fiduciary.

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Top 5 Questions To Ask When Looking For A Financial Advisor

5 Questions To Ask When Looking For A Financial Advisor.

By Sarah Johnson CFP®, MS, RD

There is no doubt that having a good financial advisor keeps us on track and more likely to reach our financial goals. However, these days finding the right one who puts your interest first can be difficult.

Here are the top 5 questions you need to ask when interviewing potential advisors.

1.) Are you a fiduciary? While we would love to think that all people working in the financial world are legally required to act in their client’s best interest, this is not the case. Non-fiduciaries are only required to recommend products that are “suitable”- even if they come with a higher price tag for you. This is why you must find an advisor who is legally obligated to always act in YOUR BEST INTEREST. Above all else, this is the most important question to ask potential advisors.

2.) How do you get paid? Going along with question #1, try to find a fee-only advisor (those particular words: fee-only. Do not be tricked by fee-based – this is not the same thing). Fee only means they will not be making commissions on anything they sell you, which decreases the potential for conflict of interest. Fee only advisors may charge a percentage of the assets they manage for you (1% is common), a flat fee, or an hourly fee. In short- they do better when you do better, and that is a relationship you want.

3.) What are my TOTAL costs? What you are paying should always be very clear and transparent. Fees should never come as a surprise. There will likely be some fees on top of what you pay your advisor, and it is crucial you know what those are. Ask if they will be placing you in ETFs (exchange traded funds), or mutual funds, and if mutual funds, ask what their fees are. Even so called “free” robo advising can have hidden costs to the client.

4.) Do you personally invest in what you recommend to your clients? Does the advisor put their money where their mouth is? Do they believe in what they recommend enough to invest their own money that way? If not- find out why?

5.) Are you independent from the products that you recommend? An independent advisor does not sell in-house products (sometimes referred to as proprietary funds). Instead, they will choose your products based not on what is being pushed from overhead, but rather what is in your best interest, matching your needs and risk profile.