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Financial advisors come in all shapes and sizes. Some are CPAs, some are registered reps, and some are certified, financial planners. But what does it mean to be a fiduciary when providing financial advice? Do you need to work with a fiduciary advisor? The answers may surprise you! The word “fiduciary” has different meanings in different contexts. It can refer to the trust relationship that arises when one person places confidence in another regarding a confidential matter or it can refer to someone who is trusted with another’s money or property.
When it comes to financial advisors, there are two types: non-fiduciaries and fiduciaries. In this blog post, we will answer common questions about fiduciary advisors.
What is a Fiduciary Financial Advisor?
A fiduciary financial advisor is someone who has a fiduciary responsibility. In other words, they must put their client’s interests before their own. This is not just a suggestion—it is the law. The main law governing fiduciary financial advisors is called the Investment Advisers Act of 1940. This act gives fiduciaries a special privilege: they are held to a lower standard of care than non-fiduciaries.
Fiduciary advisors are held to a “suitability standard,” which means they must choose investment products that are suitable for their clients. In other words, they must make sure that any recommendations they make are appropriate given their client’s situation.
Are You Working with a Fiduciary Financial Advisor?
If you’re not sure whether the financial advisor you are working with is a fiduciary, there are a few telltale signs that you can look for. First, if you asked the advisor whether they are fiduciary, they should tell you yes or no. If they are non-fiduciary, they must tell you that they are not fiduciary. Another thing you can do is look at the credentials on the advisor’s wall.
For example, if you see that the advisor is a CFP (certified financial planner), you know you have a fiduciary on your hands. If you don’t see any credentials on their wall, you should ask them about their qualifications.
What is the Difference Between a Fiduciary and a Non-Fiduciary Financial Advisor?
A fiduciary financial advisor has a fiduciary responsibility, while a non-fiduciary financial advisor does not have the same fiduciary responsibility. It’s as simple as that. Here are the details:
- Non-fiduciary advisors are held to the “suitability standard.” This means they must recommend products that are suitable for their clients.
- Fiduciary advisors are held to a higher standard. They must recommend investments that are “suitable” as well as “appropriate” for their clients.
- Non-fiduciaries are allowed to receive compensation that is not in the best interest of their clients. There are certain limits on the amount of compensation they can receive, but those limits are higher for non-fiduciaries than they are for fiduciaries.
The Dangers of Working with a Non-Fiduciary Financial Advisor
A fiduciary advisor will act in your best interest. A non-fiduciary advisor may not. A fiduciary advisor is legally bound to put your interests first. A non-fiduciary advisor does not have any legal obligation to put your interests first. A fiduciary advisor is not allowed to earn a commission based on the sale of investment products. A non-fiduciary advisor is allowed to earn a commission based on the sale of investment products.
This is not illegal per se, but it does create a conflict of interest. A fiduciary advisor is prohibited from selling you products with high sales loads. A non-fiduciary advisor is allowed to sell you products with high sales loads.
So, Do You Need to Work With a Fiduciary Financial Advisor?
The short answer is yes. You want to work with a fiduciary financial advisor so that you can be sure that your best interests are always put first. While non-fiduciary advisors are bound by a suitability standard, fiduciaries are bound by a fiduciary standard. This means they are held to a higher standard of care.
If your financial advisor is not a fiduciary, you should seriously consider finding someone new. The good news is that savvy consumers can identify a fiduciary advisor with relative ease. If your advisor is a CFP (certified financial planner), an RIA (registered investment advisor), or a CPA (certified public accountant), you can be sure that you are working with a fiduciary advisor.