“A fiduciary advisor puts your best interests over their commissions. Having a fiduciary might help you avoid getting products and services that don’t fit your situation.” Jerry Yu
If you were going on a cruise, would you want the ship’s captain to be a novice sailor or an experienced, licensed professional? You’ll probably choose the cruise captain most likely to ensure your trip is as stress-free and successful as possible. You would want the trained professional who will act in your best interests and get you home safely. It’s the same when you start thinking about the spend-down (retirement) phase of your life. The choice you make about who you will entrust with helping you save, invest, and manage your wealth will impact you for the rest of your life. That’s why ensuring your financial advisor provides a fiduciary standard of care is so critical.
What is a fiduciary anyway?
A fiduciary is any financial professional who is legally and ethically obligated to always act in his clients’ best interests. Advisors who are fiduciaries adhere to the highest standards and must only offer the products and services that best meet your needs instead of just those that pay the highest commissions.
Not all financial advisors are fiduciaries, however. The designation “financial advisor” is so unregulated that anyone can put it on a business card or in an advertisement. Whether a financial advisor is required to have a fiduciary standard depends on their classification.
Legislation regarding financial advisor trustworthiness has numerous gray areas, forcing clients and potential clients to do the lion’s share of due diligence when vetting advisors. The many types of advisors and agents, along with certifications, designations, and licenses, make vetting a challenging prospect, though.
Under new Securities and Exchange Commission (SEC) reforms, financial advisors who operate through a “broker-dealer” are not required to adhere to a fiduciary standard of care. Instead, broker-dealers and their advisors work under a lesser “suitability standard of care.” Broker-dealers follow a suitability standard set by the Financial Industry Regulatory Authority, or FINRA. FINRA’s lesser suitability standard of care makes it easier for advisors to justify selling higher commission items that may or may not be the right solutions for a particular client.
How can you tell if your advisor is a fiduciary?
Fiduciary regulations are often full of gray areas, leaving you with the responsibility of thoroughly checking out a potential financial advisor. Some things that may help you determine whether your advisor candidate is operating within a fiduciary framework include:
- 1. Looking them up online. The SEC’s advisor search tool, available on their website, is a good starting point for discovering if someone is a fiduciary advisor. If you find out, for instance, that a firm acts as a Registered Investment Advisor (RIA), you can view the required Form ADV Part 2A filing to learn more. This form outlines, in plain English, the firm’s compensation methods and other pertinent information.
- Visit the advisor or firm’s website. Reading the disclosures on an advisor’s website can help you discover the fiduciary status of an advisor. Usually, you will see something like this:
“Investment advisory services offered through ABC Wealth Management, a registered investment adviser….” This language lets you know the firm is probably an RIA with available documentation you can review.
- Check for membership in fiduciary organizations. Associations such as “Fee-Only Network” or the National Association of Personal Financial Advisors have strict requirements that only advisors who are true fiduciaries may join. Typically, these fiduciary sites allow you to search for fiduciaries in your area.
- Online reputation. Googling a potential advisor can yield crucial information such as any past regulatory violations or sanctions the advisor may have had, along with client feedback.
Summary: Choosing the right financial advisor should never be undertaken lightly. Finding an advisor committed to only doing what’s best for you is a challenging task that is crucial to retirement success. Fee-only or fee-based financial professionals who adhere to fiduciary standards are often an excellent choice.