How to Tell if a Financial Advisor is a Fiduciary

FT Contributor  | 

The role of a fiduciary is a very confusing and nuanced topic to grasp, especially in relation to other service providers. When your financial life is at stake, you want to be certain that the financial service you are being offered has your best interests in mind, without any ulterior motives. Discover the differences between a financial advisor and a fiduciary, as well as what to ask your financial advisor to ensure they’re giving you financial advice that best suits your situation.

What Is a Financial Advisor?

A financial advisor helps create strategies to eliminate financial risk and build long-term wealth. Advisors use their knowledge to create a personalized financial plan that will ultimately allow you to reach your financial goals. A plan can include strategies for investing, saving, budgeting, insurance, and taxes.

Financial advisors will check-in with their clients regularly, adjusting their strategy based on a client’s current financial situation and future goals. Following the regulations set forth by the Securities and Exchange Commission, a financial advisor’s duties include:

  1. Market research and analysis.
  2. Assessment of client needs and goals.
  3. Recommend and execute strategies.
  4. Monitor client accounts.
  5. Identify new opportunities.

What Is a Fiduciary?

A fiduciary is a person that holds a legal or ethical trust with another individual and acts on their behalf. More specifically, fiduciaries can be a single person or an organization that acts with another person’s best interests in mind. Fiduciaries act out of good faith and trust to manage a person’s assets. They may also be responsible for a person’s general wellbeing, but most often fiduciaries are hired to handle financial matters.

Fiduciaries are commonly involved in business relationships. The most common relationship is between a trustee and a beneficiary. Other fiduciary relationships include:

  1. Board members and shareholders.
  2. Executors and legatees.
  3. Guardians and wards.
  4. Promoters and stock subscribers.
  5. Lawyers and their clients.
  6. Investment corporations and their investors.

How to Find a Fiduciary Financial Advisor

Many people wonder if their financial advisor is a fiduciary. A financial advisor who is a fiduciary is legally and ethically obligated to put you and your best interests first. Fortunately, there is a set of telltale questions to ask your advisor to find out if they are a fiduciary. Each question below will give you insight into the roles of a service professional. Ask your financial professional these questions to find out if they are also a fiduciary.

Do You Receive Pay Outside of What I Am Paying?

Fiduciaries are required to be transparent with their fees, commissions, and compensations. They must also disclose any potential conflicts of interest that might influence a client’s decision to use their service.

Some financial advisors receive commission or other types of product-based compensation when their clients invest in particular funds. This can represent a clear conflict of interest, meaning your financial advisor is not a fiduciary. A fiduciary financial advisor provides unbiased advice and does not sell you on investment products.

What Credentials Do You Have?

Becoming a fiduciary requires special training. Ask about the advisor’s financial background and any credentials they have. You can also search online to check their credentials and find out whether they are a fiduciary.

Your financial professional might have three letters after their name, which represents a professional designation. Common designations include:

  1. Certified Financial Professionals (CFP). They are held to a fiduciary standard by the CFP Board of Standards, which applies to a variety of financial planning aspects, including retirement, tax, and insurance advice.
  2. Chartered Financial Consultants (ChFCs). They are held to a fiduciary standard by the American College of Financial Services’ Code of Ethics, which covers the CFP designation in addition to more specific areas of personal finance.
  3. Accredited Investment Fiduciary (AIF). This designation is issued by the Center for Fiduciary Studies and requires designees to prove their knowledge of fiduciary rules and engage in ongoing education.

How Are You Registered?

Certain financial advisors are registered as investment advisors and broker-dealers. While being dual-registered does not indicate that a person is a fiduciary, it can give insight into whether an advisor is coming from the place of an investment advisor or from the role of a salesperson.

Broker-dealers are often salespeople, which means they are not a fiduciary because they stand to make a commission. If your financial advisor is a broker-dealer, ask specific questions about their role in your investment opportunities and any fees that might be associated.

What Are Your Areas of Expertise?

The Certified Financial Planner Board of Standards requires fiduciaries to define what services they provide and stick within that realm. These rules state that a CFP should outline their services and only offer advice in the areas they are competent in. If their suggestions are outside the realm, there is a good chance that they have ulterior motives.

Have You Been Cited?

It’s important to monitor your financial advisor’s history of citations, especially in relation to complaints about financial and advisory services. A fiduciary is meant to act in the best interest of an individual, and citations can prove otherwise. To be certain, check their records with resources like FINRA’s BrokerCheck. There, you can see if a fiduciary has any complaints and you can peruse their history of providing financial and advisory services.

Are You a Fiduciary?

Although this seems silly, it is crucial to just ask someone whether they are a fiduciary. How your financial advisor answers that question is key in determining whether they are a fiduciary. For example, if they say they are “acting as a fiduciary,” they may not be an actual fiduciary. To find out once and for all if they are a fiduciary, ask to see their credentials.

Not all financial advisors are fiduciaries. Conduct your own research and ask the right questions to find out whether your financial professional is a fiduciary acting with your best interest in mind.


Image Source: https://depositphotos.com/