Financial Planning

Fiduciary Financial Advisor: Client-Centric Financial Guidance

Published by Bob Gustafson

Fiduciary Financial Advisor: Client-Centric Financial Guidance

When it comes to financial planning and wealth management, you want an advisor that has expertise in financial advice and investment strategies. But more valuable is a financial expert who is also bound by a legal and moral duty to prioritize your best interests. A fiduciary financial advisor has both the expertise you need and the trust and ethical responsibility that ensures they are working in your best interest.

This commitment to client-centricity distinguishes fiduciary advisors, setting them apart as professionals dedicated to transparency, integrity, and a personalized approach to financial well-being. Let’s look into the fundamental aspects of what defines a fiduciary financial advisor and why their role is pivotal in fostering a relationship of confidence and mutual success.

The fiduciary standard

The term fiduciary became popular during the Obama administration when they decided that it was in the best interest of the nation to hold financial professionals who provide advice to the public as it relates to their retirement accounts, to the fiduciary standard.

The fiduciary standard means that the highest priority is to recommend investments in their client’s best interests, not their own. It is about loyalty and trustworthiness and doing what is right, especially when no one is watching. When they present financial products or funds, they have reasonable fees.

But, despite the enhanced visibility of the term, many people still aren’t entirely clear about its definition, let alone how the term impacts their own financial situation or choosing a financial advisor. And, to this day, not all financial advisors are required to be fiduciaries.

What is a fiduciary financial advisor?

A fiduciary financial advisor is a financial advisor who, by law, must always:

  • Act in the best interests of their clients. This legal obligation helps ensure that the advice and recommendations provided are aligned with the client’s financial objectives.
  • Focus on understanding their clients’ unique financial situations, goals, and risk tolerances. They tailor their advice to meet the specific needs of each client.
  • Make every effort to avoid conflicts of interest. When conflicts do arise, must disclose them to clients and take steps to address them in the clients’ best interests.
  • Exercise a high standard of care in managing their clients’ investments and providing financial advice. This includes staying informed about changes in the financial landscape and adapting strategies accordingly.
  • Be transparent about their fees, compensation structure, and any potential conflicts of interest. This transparency helps clients make informed decisions about their financial affairs.

And, if an auditor checks on them, a fiduciary can be found liable if they are not making decisions in the best interest of their client.

Are all financial professionals fiduciaries?

You may wonder, shouldn’t all financial advisors be fiduciaries? Some people would argue yes, but it’s actually not the norm these days. The vast majority of financial services professionals are not held to the fiduciary standard. They are held to a lower standard called the suitability rule.

The fiduciary standard is a high standard, indeed. Registered Investment Advisors are fiduciaries. They work in your interests and not in the interests of any company or themselves. If they fail to do so, they could find themselves in serious trouble.

That does not mean most financial professionals are not honest. I know many that put their clients’ best interests ahead of their own, even though they are not required to by law.

What is the suitability rule?

Since financial advisors aren’t required by law to be fiduciaries, our advice to you is: buyer beware! There’s something called the suitability standard in the financial industry. In essence, this is a protection in place for consumers working with non-fiduciary financial advisors.

I like to think of the suitability rule as a modified “buyer beware” standard. Financial service professionals held to the suitability rule only have to:

  • Make a cursory inquiry into a customer’s financial situation when they are recommending a financial product.
  • Supply that customer with written disclosures about the risks.

The customer must make sure the financial product is right for them by reading these disclosures. And we know how much we read the volumes of fine print. Unfortunately, most people do not have the ability to discern if the financial product being offered is right for them.

Financial service professionals are not required to make sure the product is optimal if only held to the suitability standard. They are also not required to point out potential conflicts of interest influencing their recommendation such as compensation differences between various competing products.

Another situation to be aware of is a financial advisor who wears two hats. Some advisors can be acting as a fiduciary within certain transactions. But, in other transactions, they may be acting as a non-fiduciary. In order to be crystal clear, you should ask this question: are you working for me in a fiduciary capacity at all times?

If you have a great deal of knowledge as it relates to financial matters, a financial service professional that is held to the suitability standard may be right for them. But if you are not in that category, you probably should look for a financial advisor who adheres to the fiduciary standard.

Fee-based or commission-based

Now, let’s dive into the different ways a financial advisor can make money.

A fiduciary will make money by helping manage their clients’ money. Specifically, they’ll generally earn a percentage of the investment. It’s a transparent fee the client will see on their statement.

On the other hand, a non-fiduciary relies on commission-based products. The tricky part of this scenario is that each product may have a different commission structure. Thus, it’s harder to discern how much money they are making on a transaction. So, as the consumer, you also need to be aware of that caveat.  

Protecting your retirement savings

Take the following steps on your own behalf:

  • Ask your advisor if they adhere to the fiduciary standard. If they do, they will tell you right up front and will acknowledge it in writing. If they don’t, they will dance around the question.
  • In particular, be aware of your options during transition times, such as changing jobs or retiring. Don’t simply roll over your money just because a commission hungry financial person tells you it’s a good idea. Sometimes it can be a good idea to do so but many times it may not.

Do you need a fiduciary financial advisor?

If you need a financial service professional, choose the professional that adheres to the standard that makes the most sense for you. This is an important step in choosing the ideal financial professional for you. If you’re not financially savvy, working with a fiduciary financial advisor makes the most sense! One last thought, if you want to work with a fiduciary, make sure you have a signed contract that states clearly that they are working in this capacity. Want to learn more? Give us a call today!

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