Being a fiduciary is a topic that is near and dear to me. It might be the most important word that you need in your vocabulary when you work with any financial professional. Therefore, we need to get past the idea that it sounds like an intimidating word, and start making it a part of our everyday money language. Let’s dive right in.
What is a fiduciary?
A fiduciary has a legal responsibility to put your financial well-being ahead of their own.
What does this mean in real life? A number of financial products, like annuities or life insurance, are packaged and marketed just like anything else. The firms who design the products offer financial professionals commissions to sell them.
Financial professionals may market this system as a good deal. Since they make money off of product commissions, clients may not have to pay a fee for their services. This can sound great on the surface. No fee means free financial advice!
The problem is that the recommended products may not be the best deal for the client. They may have lower returns than competing products, higher fees that eat away at returns, or they may not match your goals or risk tolerance.
On the other hand, a fiduciary, is legally obligated to recommend the best product for you, even if another product offers them a commission. Some advisors take it a step further and refuse any product commissions, choosing to work on a fee-only basis.
This is where I can provide added context. I started working in the insurance industry, receiving commissions for sales on insurance products. When I became a financial advisor, I moved into the fiduciary world. Currently, I utilize a fee-only model because I feel that this is the best way for me to serve my clients.
When you encounter financial professionals, the easiest way to find out if they’re a fiduciary is to ask. If they give you a jargon-y answer, you can ask a simpler question: How are you paid? Those answers are telling.
Types of advisors and fiduciary standing
You may be able to tell whether a financial professional is a fiduciary based on their title.
Registered investment advisor (RIA) firms are registered with the Securities and Exchange Commission (SEC) and are legally required to act as fiduciaries. While the RIA designation technically refers to a firm, it is often used to refer to individuals as well. For an advisor to register a firm, they must pass a specific test (known as a Series 65) demonstrating their knowledge of financial and investment products, but also ethics and fiduciary responsibility.
Gen Next Wealth is an RIA firm.
Certified Financial Planners® (CFPs) are bound to a fiduciary standard by the CFP Board of Standards, though this differs from a legal requirement. The board insists CFP® professionals act in their client’s best interest on a wide variety of advice, beyond just investments. However, the specifics can vary, and the rules are only enforced by the licensing board, not a government agency.
I’m in the process of getting my CFP® certification and am on track to receive it in 2020.
Broker-dealers or anyone selling you an investment via a brokerage are not fiduciaries. Instead, they’re held to a standard known as regulation best interest. Whatever product they recommend to you must be in your best interest at the time of the recommendation, but conflicts of interest are allowed, so long as they are disclosed. For example, Product A and Product B both address your needs. Product A is slightly better for your circumstances, but Product B offers the broker-dealer a commission. The broker-dealer can sell you Product B without mentioning that Product A exists, so long as the broker-dealer discloses conflicts of interest and “has a reasonable basis to believe” that Product B is in your best interest.
Lastly, tax professionals and insurance brokers are not held to a fiduciary standard. Many choose to act as fiduciaries even when they are not required to do so.
Reading the fine print is necessary where you have professionals acting as brokers.
Finally, remember that there are no stupid questions when it comes to your money. You need to understand the products you’re buying and how the people selling them to you are paid. So always ask.
If you’re unsure about the specifics, feel free to reach out to me for a second opinion. As a fee-only advisor and fiduciary, I’m legally bound to give you an honest answer.
You can hear me talk more about the different types of advisors and fiduciary responsibilities in my podcast on financial planning.