The Truth About Fiduciaries

Share on facebook
Share on twitter
Share on linkedin

We hear a lot about fiduciaries in the financial industry these days, but what does it mean when a financial advisor calls oneself a Fiduciary? 

The origin of the word “Fiduciary” comes from the Latin word “Fidicia,” which means trust.

Trust is a critical component to any meaningful relationship. When it comes to financial matters, most people want to work with a financial advisor who they feel they can trust. 

The Securities Exchange Commission and State business oversight committees have created a higher level of trust in the financial industry by setting a standard that eliminates conflicts of interest and requires disclosures, thus giving consumers confidence that a fiduciary financial advisor is acting in their best interest. 

Table of contents
What Is A Fiduciary Financial Advisor?
How To Tell If A Financial Advisor Is Fiduciary
Fiduciary Vs. Suitability, Can You Be Both?
Why Should I Work With A Fiduciary Advisor?
What To Look Out For With Fiduciary Advisors
What Does It All Come Down To?

What Is A Fiduciary Financial Advisor?

The definition of a fiduciary is an organization or person who acts in their client’s best interest. This means that a fiduciary financial advisor will put the client’s financial goals ahead of their own interests. Fiduciary financial advisors are held to a significant level of trust by avoiding conflicts of interest. At times when a conflict of interest cannot be avoided, it must be disclosed to the consumer.

In other words, a fiduciary must only recommend investments that will fit best for the clients’ needs based on an agreed-upon fee for service. They are not allowed to recommend any investments that pay a commission or give an incentive for the advisor to promote them. 

Fiduciaries also exist outside of the finance industry. Board members, trustees, and attorneys are examples of people with fiduciary duties to their peers. 

How To Tell If A Financial Advisor Is Fiduciary

There are many financial advisors in the world, but not all of them are fiduciary. 

There are a few options when becoming a fiduciary advisor, and each option has its own qualification process. Here are the few different organizations that an advisor can qualify with to become a fiduciary:

In most cases, it is best for the client to verify the fiduciary status of an advisor because the legislation behind regulating certifications like “wealth advisor” and “financial advisor” is loose. Non-fiduciary advisors are only held to a suitability standard, not the fiduciary standard. 

To learn if your advisor is fiduciary, search their name in the SEC database.

Also, most certified financial planners are fiduciaries. You can verify certified financial planners (CFP) on the CFP Board’s site

Fiduciary Vs. Suitability, Can You Be Both?

Here’s the deal: a fiduciary is an organization or person who acts in their client’s best interest. All investment advisors that are registered with the SEC must act as fiduciaries. 

The suitability standard means that the broker-dealer must have a reasonable belief that the investment plan they are recommending is suitable for the customer. Broker-dealers, stockbrokers, and insurance agents only have a suitability standard to follow. This can be a problem because there is likely to be conflicts of interest. 

Another potential flag regarding a suitability advisor is that the “reasonable belief” is not specific and allows the broker-dealers to sell products that benefit them and may not necessarily be the best investment for their client. 

To get specific, The Advisers Act mandated that the fiduciary standard is applied to advisors who are in the business of and compensated for giving financial advice. The Exchange Act that enforces the suitability standard is applied to brokers selling a financial product to a customer. In other words, the suitability standard is far looser and less regulated. 

Technically, it is possible to operate part-time in both of these standards. This can happen when an advisor is affiliated with both a Registered Investment Advisor and a broker-dealer. This allows them to act in either role when advising you. And since they are acting as a broker-dealer part-time, they can advise you into investment plans that benefit them, without breaking the law. 

Yikes!

The best way to avoid this is to know if your advisor is a full-time fiduciary or only part-time. 

Pro tip: Ask your advisor the next time you meet if they are a full-time fiduciary. 

If you want a financial advisor who will act in your absolute best interest, we recommend that you invest with someone who is legally obligated to do so. 

Why Should I Work With A Fiduciary Advisor?

Trust is the heartbeat of any healthy relationship. Needless to say, you want to have a lot of trust in your financial advisor. It is much easier to trust someone who is legally held to act in your best interest, which is a fiduciary advisor. Brokers were never meant to give financial advice, just advise a single transaction. 

Most financial advisors have the ability to design an investment plan to the needs of any circumstance. There is never a one size fits all solution for a person’s finances. For example, here at WealthGuard Advisors, most of the time our clients want us to create consistent and sustainable growth while mitigating risks. 

The best time to start working with a fiduciary advisor is now. There is never a time in one’s life that is too early or too late to start investing properly. Feel free to contact us about your investment plan. 

What To Look Out For With Fiduciary Advisors

We recommend working with fiduciary financial advisors, but there are a few things that you should understand before doing so. 

Most advisors structure their fees in the following ways:

  • Flat percentage fee
  • Flat dollar fee
  • Percentage of assets managed

Every advisor has their own rates, but it is common for advisors to charge between 0.59% and 1.18% (according to AdvisoryHQ 2020-2021). Most advisors offer lower fees for accounts that are larger than $1,000,000. 

This is very important to understand because each advisor will be charging you a different amount to manage your investments. 

When people look for a financial advisor, there are 5 mistakes that are very common. Don’t make them!

5 common mistakes that happen when looking for a financial advisor:

  • Not asking about credentials

There are a ton of different credentials that advisors can have. Some advisors are less certified than others and specialize in different things. Even better than asking about their credentials is understanding which type of credential can help you accomplish your goals in the best possible way. 

  • Making assumptions

Regardless if they are with a reputable brand or not, assuming things about your advisor without double-checking is detrimental. Not to mention, most advisors specialize in specific areas and they may not be the right fit for you. 

  • Not understanding their fee structure

Lots of people just don’t ask how their advisors are paid. Inquiring about the fee structure will help you to understand your costs and make you feel more comfortable about how the advisor makes their investment decisions. 

To put it in simple terms, if an advisor earns money by ignoring your best interests, look somewhere else. 

  • Hiring the first advisor you meet

It can be tempting to hire the first advisor you talk to, so you can move on and focus your energy on other topics in life. The odds are the first advisor may not always be the best-fit advisor for you. The local advisor who is closest to home seems convenient, but may be a bad fit so be sure to ask about the advisor’s investment style. 

  • Hiring a non-fiduciary advisor 

Fiduciary financial advisors are obligated by law to eliminate conflicts of interest. Make sure to check if your advisor is fiduciary or not by searching for them on the SEC database, and/or the CFP Boards’ site. A non-fiduciary advisor is not held to the same standard as a fiduciary financial advisor.

What Does It All Come Down To?

The good news is that the government regulates fiduciary advisors more in comparison to all other financial advisors. 

This means that once you verify that someone is a fiduciary, you can have more confidence that they are looking out for your best interest. To recap, the best way to tell if your financial advisor is a fiduciary is to search them on the SEC database, and/or the CFP Board’s site

So if you are looking for a fiduciary financial advisor to help you achieve your financial goals, then we would love to talk to you.

Leave a Comment

Your email address will not be published. Required fields are marked *

Disclosures

WealthGuard Advisors, Inc. is a Registered Investment Adviser.  California Life Insurance license numbers: Casey Murdock #0F01130.

This website is a publication of WealthGuard Advisors, Inc. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Blog articles and certain content were prepared by a third-party provider. Content should not be viewed as personalized investment advice or as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities discussed. A professional advisor should be consulted before implementing any of the strategies presented. Hyperlinks on this website are provided as a convenience and we disclaim any responsibility for information, services or products found on websites linked hereto.WealthGuard Advisors, Inc. is registered as an investment advisor with the Securities and Exchange Commission and only do business in states we have notice filed. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. Our Client Privacy PolicyForm CRS.

This site uses cookies – small text files that are placed on your machine to help the site provide a better user experience. In general, cookies are used to retain user preferences, store information for things like shopping carts, and provide anonymized tracking data to third party applications like Google Analytics. As a rule, cookies will make your browsing experience better. However, you may prefer to disable cookies on this site and on others. The most effective way to do this is to disable cookies in your browser. We suggest consulting the Help section of your browser or taking a look at the About Cookies website which offers guidance for all modern browsers.