Finding a financial advisor that you can trust can be an arduous task and it’s often easiest to settle on large, recognizable names of broker-dealers when conducting a search. While the name recognition of these large companies can feel comforting in clearing up some of the unknowns about the financial advice industry, it may not always be the best option. I’m hoping to offer some helpful advice as you go about your due diligence.
The Difference Between a Fiduciary and Other Financial Advisors
In a perfect world it would be easy to spot the difference at surface level, and most of the time it is made clear from the start, but there can be gray areas, so let’s put some facts on the table. Fiduciary financial advisors have taken an oath to always act in their clients’ best interest and are legally obligated to do so. Brokers are held to a suitability standard, meaning if they can justify that the product they’re selling would benefit the client, they’re able to recommend it, even if that comes at a higher cost to you.
Fiduciary advisors act in an independent capacity and have no obligation to Dealers to sell certain products or reach certain sales goals. Brokers work first and foremost for their company and follow less stringent guidelines with the suitability standard. This isn’t to say that all brokers are bad and will make recommendations that are poor choices for their clients, they’re just not obligated to make the best choice every time.
How Does This Affect You?
A key difference that we’ll keep coming back to is cost and payment structure. Brokers earn commissions, potentially leading to over-utilization of insurance products based on suitability, diverting premiums from more effective uses. Many times, brokers are given a list of investment options from the dealer that can have higher fees than similar alternatives. With a condensed world of investment considerations, their best option may not be your best option.
Fiduciary advisors with Registered Investment Advisors (RIAs) have fee-based or fee-only compensation structures allowing them to separate themselves from the product. The difference in fees allows them to operate in a service-based model, likely offering comprehensive financial planning. Some services a fiduciary may offer include estate planning, tax planning, business exit planning, cash flow analysis, 401k analysis, and so much more. The difference is akin to putting a band aid on an injury or providing preventative care and maintenance for the underlying issues. While all fiduciary financial advisors may not offer all these services and all brokers may offer some, the incentive to sell products and move on is something to be aware of.
How do you Identify a Fiduciary?
The best way to identify a fiduciary is by looking for the CFP letters next to an advisor’s name. While this area can be a bit gray when it comes to one-time recommendations, in most cases Certified Financial Professionals are required to act in a fiduciary capacity. Another strong determinant is if they blatantly state they are a fiduciary on their website. Finally, you can ask them to sign a Fiduciary Oath to clear up any questions. If they don’t want to, you may have your answer.
Money is a universal tool and vital resource for you and your family. I urge you to seek out a professional that acts in your best interest to help you achieve your financial goals. While the process in finding a trustworthy financial advisor can be time consuming, it’s better to put the legwork in up front so you can enjoy the benefits down the road. The industry of financial advice is evolving and I believe we’re heading towards the fiduciary standard being more prominent in the landscape. Until then, I hope my take helps you make sound decisions as you look to navigate your financial journey.
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Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.
