A fiduciary is a person who has the legal and ethical responsibility to act in your best financial interest. In 2019, the Securities and Exchange Commission (SEC) adopted the Regulation Best Interest rule aimed at protecting investors and increasing ethical standards for financial advisors.
What is Fiduciary Duty?
Fiduciary Duty is a legal term. According to Cornell Law School, “when someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else”. Fiduciary duty is not tied to the performance of your advisor – just that they are acting in your best interest – even if they perform well or poorly. There are certain standards fiduciaries must adhere to:
- Put their clients’ best interests at the forefront of their strategy and recommendations
- Provide any relevant information to clients
- Avoid potential conflicts of interest, and disclose where such conflicts may arise
- Must not be acting in a way to solely benefit themselves
- Work to reduce costs to their client
Should Your Financial Advisor Be a Fiduciary?
Our recommendation is that people use fiduciary financial advisors when it comes to planning finances. A fiduciary financial advisor adds an extra layer of trust that’s built-in and a requirement that they’re acting with your best interest in mind. Working with a fiduciary almost guarantees the person will only recommend products and plans that are going to benefit you well before it benefits them.
A fiduciary is a good idea if you’re looking for someone who will offer investment advice that will also coincide with your long-term goals. For example, they’ll take a close look at your age, income and your financial goals before they make investment recommendations. They will perform more service than a stockbroker will or can provide, in part because they have additional certifications. Finally, if you’re unsure how to manage your finances or are new to budgeting, but you know that you do need a financial advisor of some sort, it’s best to go with a fiduciary financial advisor.
How to Tell if an Advisor is a Fiduciary?
The simplest way is to ask your potential advisor. They will be more than happy to divulge if they are a fiduciary. If you haven’t spoken to someone yet and you want to make sure they’re a fiduciary before setting up a meeting, there are a couple things to look for.
You can find out if someone is a fiduciary by looking for a financial advisor through The National Association of Personal Financial Advisors (NAPFA). Their online database makes it easy to search for an advisor based on certificates and qualifications.
Are They a Registered Investment Advisor (RIA) or Certified Financial Planner (CFP)?
RIAs are bound to fiduciary standards and designated Certified Financial Planners (CFPs)are required to be fiduciaries as well. With around 300,000 financial advisors in the U.S., you will have your choice, so it would be wise to make sure you go with a fiduciary. If you’re worried about whether or not your advisor is a CFP, you can verify their certificate here.
Is Your Advisor a Broker or an Insurance Agent?
Please be advised, that a broker is not the same thing as a CFP, and therefore, not held to the same standards. Similarly, an insurance agent is not a fiduciary, so if one of the decisions you’re looking to make is related to insurance, it might be better to explore working with a fiduciary financial advisor.
Are Robo-Advisors Considered Fiduciaries?
Robo-advisors are investment platforms that use information about your finances and life situation to determine your investment strategy. They’re completely automated, although some offer help from real advisors as needed. While robo-advisors claim they are fiduciaries, there is debate amongst experts.
Technically robo-advisors satisfy the three requirements of fiduciary duty – avoiding conflicts of interesting, choosing low cost services and providing suitable recommendations. The degree to which they satisfy each tenant is debatable. Since they are automated, it is easy for them to avoid conflicts of interests. Most robo-advisors are also looking to reduce costs for their users.
Next Steps When Finding a Financial Advisor
More than anything, do your research, no matter who (or what) you choose to have you help manage your finances. I say this all the time, but your financial health is one of the most important aspects of your life. Good financial health helps you sleep better at night, reduces stress in long-term romantic relationships and allows you to put your focus elsewhere. Whether you choose a financial advisor or robo-advisor, look closely at the fine print and ask questions before you sign anything or move any money around.