A lawyer has an ethical duty to represent and inform his client to the best of his ability, regardless of moral differences.
A doctor adheres to a strict level of confidentiality when conferring with her client, bringing years of education and experience to providing sound health advice.
What both of these positions have in common is a fiduciary standard, which in legal language, is defined as:
“An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.”
From a social standpoint, we recognize the importance of this responsibility. It is so ingrained in our understanding of these roles that we expect nothing less from these individuals when they perform their duties.
When it comes to investing the money you’ve earned, you should have the same expectations. You want an advisor who is a fiduciary.
What may come as a surprise to some is that not all advisors are fiduciaries. Therefore, it’s important to do a little research and make sure that the person managing your money truly does have your best interests in mind.
In the financial advisor world, there are brokers and fiduciaries. As we’ve discussed, fiduciaries have a legal obligation to do what is right for you to the best of their ability. Brokers however, do not. They adhere to a “standard of suitability”, which means they are allowed to pursue their own interests before yours and are really only held accountable to a point of “suitability” (i.e. “this investment is good enough”).
This means they may recommend an investment not because it is the best investment for YOU, but because it’s an okay investment for YOU and a great investment for THEM.
Brokers make their money on commissions based on trade frequency from certain types of investments. We call these commissions “conflicts of interest”, because they reward trading activity regardless of how it benefits you. Brokers do not have to tell you about any of these conflicts of interest when they tell you how to invest your money.
A fiduciary, on the other hand, is obligated to avoid conflicts of interest to the best of their ability, and to inform you of any that are unavoidable.
In some situations it can be difficult to tell where your advisor lands on the issue. In fact, some will go out of their way to make their answer convoluted.
Here are a few easy ways to check and see if your advisor is a fiduciary:
1. Disclosure agreements
All advisors have disclosure agreements, which you and the advisor will sign before you work together. Among many things, these agreements define whether an advisor is acting as a fiduciary or not. However, after years of new regulation, many of these agreements have become tedious and difficult to understand.
While we absolutely recommend taking the time to understand your advisor’s disclosures, there are easier ways to determine right off the bat if they adhere to a fiduciary standard or not:
2. Ask them!
An advisor that claims to be a fiduciary must abide by the legal ethics that come with that title. That claim can be enforced in a court of law. Advisors who say they are fiduciaries, but instead make decisions based on their own personal gain, can be sued for damages.
3. Check their certifications.
The CFP ® certification mandates a fiduciary standard that all Certified Financial Planners must uphold to the best of their ability as specified by the CFP ® Board. If those duties are not maintained, they risk losing their certification.
The CPA certification holds a fiduciary standard akin to that of a lawyer. They must adhere to client confidentiality and a breach of that trust is illegal. This is one of the reasons CPA’s make such great advisors.
4. How often do you hear from them?
An unspoken understanding of the fiduciary standard is that an advisor can’t do their job if they don’t know who you are. This means they take the time to schedule regular meetings and check-ins with you to make sure things are on track. They want to know about your personal goals and how you feel about risk. They want to answer the questions you have and respect you for asking them.
If this has not been your experience, you may want to ask how your advisor knows what to do with your money.
It's important to recognize that an advisor who is acting as a fiduciary for you is doing more than just bringing you financial advice. They can help you plan your finances for the rest of your life.
One of the most rewarding parts of our jobs is getting to know clients and their families and helping them make plans that will bring them success. We recognize these relationships can last for years and the onus is on us to make sure that what we do is right for the people we serve.
If you’d like a copy of our disclosure agreement, or have any questions about the fiduciary vs. suitability standard, we welcome you to get in touch!
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