It’s more important than ever to have a solid financial plan in place. A financial advisor provides advice and guidance to clients regarding investments, insurance, and other financial planning matters and can help clients set financial goals and make plans to achieve those goals. Perhaps most importantly, a financial advisor can help you prevent making emotionally charged decisions to buy or sell investments. According to a survey conducted in 2020 by Age Wave and Edward Jones, among those who work with a financial advisor, 84% said that doing so gave them a greater sense of comfort about their finances. According to the National Financial Educators Council, a lack of personal finance knowledge costs the average American $1,300 a year. Other studies have shown that working with a financial advisor vs. going it alone can add an additional 4% per year to your investment returns.
A fiduciary is someone who manages property or money on behalf of someone else. When you are a fiduciary, the law requires you to manage the person’s assets for their benefit—not your own!
In a fiduciary relationship, the person who must prioritize their clients’ interests over their own is called the fiduciary. The person receiving services or assistance is called the beneficiary or principal.
A fiduciary relationship can exist between friends or family members. For example, you might manage a friend’s expenses if they become ill and undergo medical treatment. But more commonly, you’ll deal with a fiduciary when working with professionals, such as lawyers and financial advisors.
Fiduciary duty is a serious obligation. If a fiduciary doesn’t fulfill their duties, it’s called a breach of fiduciary duty and the beneficiary could be entitled to damages.
Anyone can legally call themselves a financial advisor and provide financial advice, making it particularly important you know what standard the person managing your money holds themselves to.
Financial advisors who are fiduciaries must act in the best interest of their clients, offering the lowest cost financial solutions to fit their clients’ needs; but it’s important to note, not all financial advisors are fiduciaries.
Most financial advisors, even if they aren’t fiduciaries, must consider your interests when offering advice and selling investment products. This is called the suitability standard and is not the same as a fiduciary standard. Only fiduciary financial advisors are legally obligated to place your best interest over theirs. Fiduciary recommendations must carefully consider your overall financial situation (suitability), but they must also offer you the most economical solutions and products with the best performance to meet your needs (fiduciary).
Generally, financial advisors who work for brokerages and large investment firms are not fiduciaries and are only held to the lower legal suitability standard of care. These non-fiduciary advisors offer investment advice and product recommendations that are suitable for you, meaning the investment products generally fit your needs but may have higher sales charges, fees, or pay the advisor a larger commission.
Fiduciary financial advisors usually work for Registered Investment Advisory firms or are Independents and do not sell investment products or receive sales commissions.
When you hire a financial advisor, it’s important to ask if they are a fiduciary and how they make their money. This helps you identify potential conflicts of interest. Advisors are commonly paid in the following ways:
Commission-Only Financial Advisors: Commission-only advisors only make money when they sell investments or a particular financial product. Commission-only financial advisors are usually employed by broker-dealers and large investment firms and are only held to the suitability standard not a fiduciary standard.
Fee-Only Financial Advisors: Fee-only advisors only make money from client fees. These might come as flat or hourly fees or as a percentage of all the assets they manage for you. They do not earn commissions on investments, nor do they get a fee when you buy or trade securities. Because of this, fee-only financial advisors generally have fewer conflicts of interest than other advisors, but still must disclose any conflicts they do have. Fee-only financial advisors are almost always fiduciaries.
Fee-Based Financial Advisors: Fee-based advisors are hybrids and may have fees like fee-only financial advisors, but also may earn money from commissions or referral fees, like commission-only advisors. If you choose a fee-based advisor, you want to make sure they are always acting as a fiduciary. Some fee-based advisors may not act as a fiduciary when they perform certain tasks. It’s important to note that just because an advisor receives a commission for a product, doesn’t necessarily mean it’s not in your best interest. Certain products, like life insurance, are only sold on a commission-based model. It’s assumed that if you really need it, it’s in your best interest, even if the advisor is paid a commission.
Many financial advisory professionals advocate for people to use fee-only advisors because they are in the position to prioritize your financial wellness over the amount of commission they will receive from selling you a particular investment product. Obviously the choice of where and who you receive your financial advice from is a personal decision but it’s important to understand how advisors are paid when making that choice. to get started, contact us by clicking here.
