There are many things to consider when selecting a financial advisor. One aspect which is often overlooked or misunderstood is knowing what a financial advisor’s responsibility is toward you, their client. One way to know for sure is to ask your advisor this question:
Are you a fiduciary in all of your dealings with me?
This is a very important question. Here’s why:
By definition, a fiduciary is “a person who has the power and the obligation to act for another under circumstances which require total trust, good faith and honesty.” Fiduciaries are required to act in your best interest, regardless of what they stand to gain or lose. When we think of fiduciaries we often think of professionals, such as attorneys and accountants.
It may be natural to assume that all financial advisors are fiduciaries like other professionals we work with. After all, what could be more important than your retirement savings? But your assumption couldn’t be further from the truth. The fact is, some advisors are fiduciaries while others are not, and it’s often difficult to tell them apart.
Financial advisors who are fiduciaries will want to know your history. Of course, they will want to know about your investment accounts but they will also want to know about your spouse, your children, your parents, your career aspirations, and your hopes and dreams for your future. They will have lots of questions for you so they can manage your investments in a way that will support the life you desire.
A non-fiduciary advisor approaches your financial assets differently; they are held to a different standard. When a non-fiduciary makes a recommendation, it must only be “suitable” for someone like you – not necessarily the best recommendation for your particular situation. This seemingly small difference can have a huge impact on your finances.
According to the President’s Council of Economic Advisers, investors lose up to one percent each year on their investments as a result of non-fiduciary advice. That’s $17 billion annually in the U.S.
Many larger brokerage firms have their own proprietary investment funds, and their employees are encouraged to steer clients toward these funds. They may be offered a bonus each time one of their clients invests in a company-held fund, or they may receive an ongoing percentage based on what they have recommended their clients purchase.
This difference in responsibility to an investor can affect more than just your investments. Because a fiduciary is required to always act in their clients’ best interests, they are beholden to monitor their investments and meet with them on a regular basis. A fiduciary takes into consideration their clients’ entire financial life, including investments, tax planning, debt management, cash flow, insurance, college costs, estate planning and more.
A non-fiduciary often focuses on what they have to sell you. They are more likely to wait for you to you reach out to them with a question or concern rather than meet with you on a regular basis.
Are all non-fiduciaries just looking out for themselves? Of course not. Many of them do what’s best for their clients. The difference is they aren’t required to.