Can You Trust a Financial Advisor to Always Act in Your Best Interests?

Self-proclaimed investments democratizer Robinhood has made a lot of headlines getting to where they’re at in less than ten years. But none quite so astonishing as the idea that they may have no fiduciary responsibility to their investors.

Sadly, not all advisors are held to the same standards when placing their clients’ interests over their own.

In March, a Massachusetts judge ruled against the state’s top securities regulator in its attempt to hold online financial advisor Robinhood to a fiduciary standard. The state has until September to appeal, but ongoing legal battles across many states and on the federal level continue to highlight inconsistencies in regulations designed to protect consumers from unscrupulous advisors.

Certain financial advisors registered with the Securities and Exchange Commission (SEC) must always act in their clients’ best interests, known as a fiduciary standard. But other advisors can sometimes operate under a lesser standard, raising questions of propriety.

If you work with a financial advisor today, how can you be sure your financial advisor is a fiduciary? And what exactly does “fiduciary” mean?

What is a Fiduciary Financial Advisor?

In short, a fiduciary financial advisor must recommend the best investment solutions for their clients. It is not enough that a product is “suitable.” A higher standard applies to a fiduciary advisor.

You shouldn’t assume a financial advisor is a fiduciary. Before you hire an advisor, you should ask explicitly if they will always act in your best interest as a fiduciary. Fortunately, you can easily find fiduciary financial advisors today if you know what to look for and the right questions to ask.

Certified Financial Planners (CFP) are Fiduciaries

You can be sure your financial advisor will act as a fiduciary by hiring a Certified Financial Planner, often referred to as a CFP. Upon earning the Certified Financial Planner designation, each CFP acknowledges they will adhere to the CFP Board’s Code of Ethics and Standards of Conduct and act as a fiduciary when providing financial advice to their clients.

This means the CFP professional places each client’s well-being above their own and that of the firm for whom they work. Moreover, the fiduciary duty requires the proper disclosure of material conflicts. In practice, the advisor must act with care, skill, prudence, and diligence to best serve the client’s objectives. Finally, the advisor must comply with all laws and regulations.

“Fiduciary” Is Still an Unclear Term

While many investors seek out a “financial advisor” or a “senior planner,” those are simply titles. They do not assure or guarantee anything other than the person advertising has completed a certification course. Some advisors use these so-called certification programs to suggest expertise, which they can complete in a few days.

The term fiduciary has been used for hundreds of years and has been common parlance since 1940. But many average people do not know or understand it fully, despite the SEC’s 2019 ruling that attempted to clarify the definition.

Making it more challenging to research and find a fiduciary advisor is that the onus is on the individual. Most people are not financial experts. They do not have the time to sift through dozens of advisory firms to find the right fiduciary for their situation.

Working in Your Best Interests

Why is it so important that your financial advisor be a fiduciary? If your advisor is not working in your best interests, they might attempt to sell you a product that is not optimal for your individual situation.

For example, an investment solution might line the advisor’s pocket with commissions and high-fund fees but doesn’t help you achieve your long-term goals or level of risk. Or a non-fiduciary advisor could recommend complex products and portfolios in hopes that confused clients won’t call their strategy into question.

How Do Fiduciary Financial Advisors Mitigate Conflicts of Interest?

Many fiduciary financial advisors may choose not to offer certain products directly and instead recommend their clients purchase products elsewhere to reduce conflicts of interest.

“I might sometimes recommend a single premium immediate annuity for a small portion of a retirees income plan, says Brandon Renfro, founder of Belonging Wealth Management. “These can be useful for providing a certain amount of income that the client can rely on regardless of what happens in the market or how long they might live,” Renfro said.

In other instances, when fiduciary advisors offer their clients certain products or services, they will disclose any conflicts of interest regarding their recommendation. This way, they place their clients’ interests ahead of their own and, most importantly, act without regard to their financial interests but yours.

“I believe it’s essential for many clients to consider long-term care (LTC) coverage. However, I don’t sell them,” says Jay Rishel, a financial advisor with Overman Capital Management. “It’s not that I can’t offer them, but I’d rather see the client consult a trusted LTC-focused planner who can guide them more efficiently and effectively than I can,” says Rishel.

How Much Should It Cost to Work With a Fiduciary?

The good news is that the cost of hiring a fiduciary advisor may not be any more expensive than hiring a non-fiduciary. Often, fiduciaries work on a fee-only basis, which often means an annual planning charge of a few thousand dollars per year.

Many advisors’ fee structure is based on “assets under management,” whereby you pay a percentage of your portfolio to the advisor each year. In general, you should pay no more than 1% per year.

The Bottom Line

A fiduciary advisor is required to act solely in their clients’ best interests. They agree to put the client’s financial circumstances above their own. With so many opaque investment products available these days, working with a fiduciary is more important than ever.

Originally published at Wealth of Geeks.

By Mike Zaccardi