Think every financial professional is required to put your best interest first? Think again.
It’s fair to say most people, as non-financial experts, would consider themselves in unfamiliar territory when it comes to managing one’s wealth. And, when people find themselves in unfamiliar territory it can be hard to trust others.
A case in point is the remarkable story of Hiroo Onoda, a Japanese intelligence officer in World War II who didn’t quit fighting until nearly 30 years after the war ended. Stationed in the Philippines, he distrusted every attempt to communicate with him, from air-dropped leaflets to organized search parties, suspicious that it was all a ploy by Allied forces. He held out until 1974 when his former commander, who had since become a quiet bookseller, was sent to relieve him of his duties.
You don’t have to exercise the same level of caution with your hard-earned money.
But the fact is, anyone may call themselves a financial adviser, financial planner, wealth manager or just about any other title. This can make it difficult to determine how well you can trust someone with your money.
Fortunately, there is a telltale sign. Knowing whether or not an adviser will act in your best interest comes down to how that person is registered.
That’s why it’s important for investors to understand the term “fiduciary” (fuh-doo-shuh-air-ee). It’s the type of financial jargon that for most of us goes in one ear and out the other. Yet, understanding what it means is the best way to make sure your interests always come first.
What is a fiduciary adviser?
A fiduciary adviser is someone who manages a person’s assets on their behalf and solely in their best interest. Registered investment advisors, such as Advance Capital Management, are regulated under the Investment Advisors Act of 1940. This act bounds RIAs to the fiduciary, or “trust,” standard, which is the highest legal standard.
Essentially, fiduciary advisers are obligated by law to:
- Serve the client’s best interest, at all times
- Act in utmost good faith
- Act prudently—with the care, skill and judgment of a professional
- Avoid conflicts of interest when possible and fully disclose and mitigate any potential conflicts
- Disclose all material facts
Fiduciary vs. suitability
Not all financial professionals are RIAs, and, subsequently, not all financial professionals work under the fiduciary standard.
Registered representatives, such as stockbrokers and advisers working for insurance firms, follow the “suitability” standard. The suitability standard does not require advisers to put their clients’ interests first, nor must they disclose conflicts of interest. It’s possible that they recommend investments from which they receive the highest commissions. Therefore, it’s important to be aware that the advice you receive from one adviser to the next can differ depending on how they are registered.
Finding a fiduciary adviser
The simplest way to find out if an adviser is a fiduciary is to simply ask, “Are you a fiduciary?” An adviser who is a fiduciary will have no trouble confirming he or she is one. You can verify the adviser’s answer by checking the Securities & Exchange Commission’s adviser information database.
Finding out how an adviser is compensated is another way to determine if an adviser will act in your best interest. Fee-only advisers, meaning they charge a flat fee or a percentage of the assets they manage, are typically fiduciaries. On the other hand, you can safely assume an adviser who makes a living off commissions is not a fiduciary.
Of course, registration as a fiduciary doesn’t guarantee a successful relationship with an adviser. So, be prepared to ask more questions about an adviser’s background and services. Still, the fiduciary label can act as an important safeguard to help protect you from dishonest advisers.
Looking for a fiduciary adviser to help you reach your financial goals? We can get you started with a free investment plan.
