What is a Fiduciary?
We have all sat down with an "advisor" and wondered if their advice was trustworthy. We knew they have the knowledge but do they have our best interests at heart? So we make no decision and choose not to do anything.
Trust is the key to any relationship. It is hard to build the trust to put your life savings with someone in a simple 1-hour conversation. The Fiduciary standard is a great head start, and you should avoid working with anyone that is not a fiduciary.
So, what is a fiduciary?
When talking about financial advisors, a fiduciary is one that is legally required to always act in your best interest. As I said, it doesn't create trust but gives a good headstart. It's good knowing someone is putting your interest ahead of theirs. Fiduciaries even allow the law to back this pledge up.
This raises a question; are there advisors that are not required to put your best interest first? Sadly, yes. Most financial advisors are not required to put your interest first. They are even allowed to make recommendations based on the commissions they will make.
For most of the financial services industry's history, stockbrokers have functioned as a go-between for investment companies and ordinary people. These brokers get paid by the investment company. It may be a commission for a stock or bond sale or "load" for a mutual fund. Loads are nothing but a fancy way of charging you're to pay a commission to your broker.
In today's world, most advisors are brokers. The last number I saw had around 95% of all financial advisors registered as brokers. All wirehouse advisors, think MorganStanly and Merrill Lynch, are brokers. Also, most independent financial advisors function as a broker through Broker-Dealers (BD).
A dead giveaway that you are working with a broker is the phrase "Registered Representative of..." In my previous role, I was a Registered Representative of Cetera Advisor Networks. That phrase was on my business card, e-mail's and on every piece of mail I sent out.
What Does This Mean?
First, it does not mean that brokers are bad. Often they are good people trying to help. It also does not mean broker-dealers are bad. Both brokers and broker-deals serve a useful function in my industry. There are some people a broker may be the best option.
What it does mean is you need to do some research before just taking their advice.
In reality, something many brokers do not know; they also have a fiduciary responsibility. They are fiduciarily bound to act in their broker-dealers best interest. This does not mean they are actively looking to con you. Most businesses realize the best thing we can do for ourselves is what is best for you. It just means they do not have to do what is best for you.
In recent years many broker-dealers have created fee-based investment programs. Fee-based investment programs are designed to eliminate the conflict of interest and offer you a fiduciary relationship with a broker. This is called "Dual Registration." The financial advisor is registered both as a broker and an Investment Advisor Representative (IAR).
Don't worry. In the end, I will give you a list of questions to ask a prospective advisor.
When you are working with a dually registered advisor, they can be both a fiduciary and not.
It depends on what advice they are giving at the time. When advising you on your fee-based accounts, they are a fiduciary. When they are advising you on other accounts, they are a broker.
They can, and sometimes do, both charge a fee and earn a commission.
In 2016 I decided to leave the Broker-Dealer world and open Family Life Financial Planning. We are a Fee-Only firm. Fee-only means we never earn a commission. We do not receive any compensation from any financial product. 100% of a Fee-Only firm's revenue comes from our clients.
I believe this is the best relationship for you. It limits the conflict of interest that arises when someone other than the client pays a broker. You never have to worry that we are recommending an investment because it pays us more than a competitors investment.
Also, Fee-Only advisors are always fiduciaries. No matter the question you ask, we are required to act in your best interest. So if you ask about life insurance, even though I do not sell it, I am required to give you the best advice for you.
So, Who Do You Want to Work With?
You should always choose to work with a fee-only fiduciary financial advisor. It may seem more expensive, but frequently, that is because you see the fees instead of paying a hidden commission.
I would love to work with you. If you would like to look for other fee-only advisors in your area, www.feeonlynetwork.com is a great resource.
What Questions Should I ask
To help you sort all this information out, here are a list of yes or no questions:
Do you always act as a fiduciary?
If yes, do you put that in writing? Here is fiduciary commitment.
Do you ever receive a commission?
Are you registered with a Broker-Dealer?
Are you an insurance agent?
Working with someone you can trust is extremely important. Finding a fiduciary is the first step to finding someone you know you can trust.