8 Things You Need to Know About Fiduciary Financial Advisors

A fiduciary financial advisor limits their conflicts of interest and is required to disclose any potential conflicts of interest. A traditional financial advisor is not incentivized to limit or disclose potential conflicts of interest.

A fiduciary financial advisor must act in your best interest when offering financial advice. A traditional financial advisor is not required to act in your best interest.

A fiduciary financial advisor is obligated to find terms and prices that are best for their clients. A traditional financial advisor may have incentives to earn commissions or sell their own products.

A fiduciary financial advisor offers transparency in providing relevant information and facts to plan your future and manage investments. A traditional financial advisor is only required to make sure investment recommendations are suitable.

A fiduciary financial advisor:

• Manages your financial situation by putting your best interests first.
• Acts with prudence, with the skill, care, diligence, and good judgment of a professional.
• Will not mislead you, and will provide conspicuous, full, and fair disclosure of all essential facts.
• Avoids conflicts of interest when possible. Otherwise, they must fully disclose conflicts of interest and manage them in your favor.

Here are some questions to help determine if a financial advisor serves in your best interest.

Are you a fiduciary?

Correct: Yes. Follow-up by asking if they will sign a fiduciary oath.

Incorrect: No. Follow-up by asking why they don’t serve clients as a fiduciary.

Do you serve as a fiduciary all the time?

Correct: Yes.

Incorrect: No. Follow-up by asking for them to clarify when they are a fiduciary. 

How do you get paid?

Correct: Directly from clients or fee-only.

Incorrect: A complicated fee structure should serve as a red flag. An advisor earning money from commissions may have additional conflicts of interest.

Will you sign a fiduciary oath?

Correct: Yes.

Incorrect: No.

Download a fiduciary oath and share it with your advisor to help protect your best interests.

A financial advisor can be held to one of two standards: fiduciary or suitability.

Fiduciary

A financial advisor held to the fiduciary standard is required to put your interests ahead of their own interests.

Not all financial advisors serve clients under this standard.

Suitability

A financial advisor held to the suitability standard is not required to put your interests ahead of their own interests. To meet suitability requirements, a financial advisor must “check the boxes” for areas making up an investor’s profile, such as:

• the customer’s age
• other investments
• financial situation and needs
• tax status
• investment objectives
• investment experience
• investment time horizon
• liquidity needs
• risk tolerance

Example of fiduciary vs. suitability

A financial advisor must recommend one of two investment options to a client. The two investment options are almost identical and considered suitable investments for the client’s needs. One has a reasonably low-cost while the other charges a higher fee and pays a commission to the financial advisor.

The fiduciary financial advisor would choose the less expensive option. The traditional financial advisor following the suitability standard has more incentive to choose the higher-fee, commission-based investment.

The CERTIFIED FINANCIAL PLANNER™ designation is considered the gold standard for financial planning advice. A CERTIFIED FINANCIAL PLANNER™ is held to a higher standard than other financial advisors.

 

A CERTIFIED FINANCIAL PLANNER™ is required to serve as a “fiduciary at all times” when providing financial advice.

 

A CERTIFIED FINANCIAL PLANNER™ that works for an independent fee-only Registered Investment Advisor limits conflicts of interest in providing advice.

 

However, most CFP® Professionals are brokers, meaning they collect commissions and sell products, creating additional conflicts of interest.

 

While a CERTIFIED FINANCIAL PLANNER™ is required to serve as a fiduciary, consider the importance of limiting additional conflicts of interest when searching for a fiduciary financial planner.

A robo-advisor is an online financial advisor that provides automated investment advice with little human interaction. Does a robo-advisor serve clients as a fiduciary?

Many robo-advisors are registered investment advisors, which suggests they have a fiduciary duty to clients. As a registered investment advisor, a robo-advisor is required to act in their clients’ best interests.

However, a robo-advisor is unable to understand the entire situation of an investor. Therefore, a robo-advisor only offers advice on a limited scope.

From an investment standpoint, a robo-advisor can serve as a fiduciary with a limited scope. A robo-advisor cannot offer guidance that a human, a fiduciary financial planner, can provide from a planning standpoint.

Here are a few resources to confirm you are working with a fee-only financial advisor.

“For over 36 years NAPFA has been the standard bearer for fee-only, fiduciary financial advisors advocating for high professional and ethical standards.”
– The National Association of Personal Financial Advisors

“We strive to remove the confusion from topics such as: advisor compensation, fee-only versus fee-based, the fiduciary standard, and the value of working with an advisor.”

– Fee-Only Network

“Each of our planners uphold (fiduciary) oaths to put your interests and needs first. View signed copies of fiduciary oaths on each advisor profile”
– XY Planning Network

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FINRA: Suitability Rules
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