Fiduciary: a person or organization that acts on behalf of another person or persons, with a legal … [+] and ethical obligation to put that person’s interest ahead of their own.
As a financial advisor, there are a lot of questions I get asked almost daily. Surprisingly, “are you a fiduciary?” is not one of them. This could be the most important question you ask your current or potential advisor, and yet it seems that few people know to ask it.
It’s time to change that.
What is a “Fiduciary?”
In the simplest of terms, a fiduciary is someone who must put the best interest of the person they are representing ahead of their own.
As a financial advisor, it means only recommending strategies, products, or tools that are most likely to benefit my client, regardless of how it affects me. Additionally, it could mean turning down a potential client because I know that the services I am offering are not right for them and they could find a better match somewhere else.
A fiduciary must never take on a client who won’t benefit from available services and should never make a recommendation to that client that isn’t the best option in their situation.
Of course, even fiduciaries aren’t fortune tellers. Being a fiduciary does not guarantee a positive result. It only ensures that the decisions being made do not have ulterior motives attached.
Are all financial advisors fiduciaries?
No, no, definitely not. In fact, most advisors are not.
“Financial advisor” is a very broad and vague job title often self-appointed to someone who gives financial advice. Whether or not that advisor is held to a fiduciary standard is generally determined by their professional designation or employment status.
For example, an advisor who holds a CFP® designation, or a CERTIFIED FINANCIAL PLANNER™ practitioner, is always required to be a fiduciary. Earning this designation required years of coursework, thousands of hours of experience, a grueling exam, and the promise to adhere to the CFP Board’s Code of Ethics and Standards of Conduct.
The first standard is simple: “At all times when providing financial advice to a client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the client.”
Outside of the certifications, you can often recognize if an advisor is not a fiduciary based on their employment or relationship with their clients.
If an advisor is selling a product or employed by a company that produces a product, they are likely going to put their employer’s interest first because that is how they keep their job and even how their compensation is determined.
You’ll see this a lot with insurance products. Going to an advisor who works for an insurance company means the advisor will try to sell you insurance. That is their job and that is how the company profits. Do you need that type of insurance? Maybe. Will the advisor recommend it regardless? Possibly.
Bank employees will only recommend account types that their bank carries. You’ll never walk into a bank to ask about savings accounts and hear, “The Premier Savings account with a different bank is fantastic and would be better for you.” That employee would be fired.
Are non-fiduciary advisors bad?
Again, no. There are a lot of great advisors who are not held to the fiduciary standard. It’s just important to understand what that means.
Non-fiduciary advisors are generally responsible to two parties: you and their employer. Assuming they are not simply bad people, they will still want to give you a solution that works great for you. But it will also be one that creates profit for their company.
They can be great advisors and can offer appropriate products, but it’s important to be aware of the nature of the relationship before you start working with one.
How do I know if my advisor is a fiduciary?
I explained the CFP designation before, so if your advisor is a CFP, they are also a fiduciary. But there are a lot of other designations that financial advisors can carry. Some of these designations are rigorous to earn and others might be mere certificates of participation.
If you don’t know if the advisor is a fiduciary, just ask. I love getting asked this question because I am proud to uphold the rigid standard. If someone asks me in a meeting, it shows me they are knowledgeable about the topic and that they are taking their finances just as seriously as I am.
It is not an inappropriate, rude or taboo question. Ask it.
The lesson:
All financial advisors and planners are not fiduciaries. When establishing an advisory relationship, it’s important to know where the advisor’s loyalty lies.
Having a solid understanding of what a fiduciary is and what you’re looking for as far as a financial service or product will help protect you from being taken advantage of. This is also true of most personal finance concepts, so make sure you’re taking the time to educate yourself prior to any financial decision.
