What is a Fiduciary Financial Advisor?

By Erik H. Nelson on December 2, 2020

Have you ever wondered, “What is a fiduciary financial advisor?” While financial advisors can help manage your wealth, they don’t all operate in the same way. One component that establishes this distinction is fiduciary duty. Technically, “fiduciary financial advisor” is not an official term – a more apt description includes how the obligations of fiduciary duty apply to financial advisors. Understanding the meaning of a financial advisor with fiduciary duty reveals how professionals make recommendations and what motivates their advice.

In most cases, opting for a fiduciary is in the client’s best interest because he or she is required to reveal conflicts of interestopens PDF file that may influence advice. Keep reading to find out why it’s worth finding a fiduciary to manage your wealth.

Fiduciary Duty Explained

Financial advisors can be broken out into two separate categories: Advisors who are held to a fiduciary duty and those held to a suitability standard. Registered Investment Advisers (RIA), are fiduciaries under the Security and Exchange Commission (SEC).

The term fiduciary involves a level of ethics that isn’t necessarily present in all types of advisors. According to the SEC, an investment adviser has a fiduciary duty and is bound to be transparent and disclose any conflicts of interest to his or her clients. They must provide duty of care, which means they must provide unbiased financial advice. They must also act based on duty of loyalty, meaning they must disclose any conflict of interest are prohibited from overreaching or taking unfair advantage of a client’s trust. These principles may seem reasonable to expect from someone who manages your money, but these SEC rules clearly state the context in which investment advisors are obligated to act in the client’s best interest when they are acting with the duty of fiduciary. Both the duty of care and the duty of loyalty apply to the entire relationship between an advisor and client.

A financial advisor with discretionary authority can make trades on your behalf without having to consult you each and every time. That’s why an investment advisor’s duties are so important. They can have a wide berth of control over the details of your investments. You may not want an advisor a suitability obligation to have the ability to make investment decisions based on self-serving commissions or other conflicts of interests. If there is a conflict of interest, fiduciary advisor must eliminate it or make a full and fair disclosureopens PDF file to the client.

Trust is a major component of any relationship and your financial advisor is no different. Take the time to perform your own due diligence before choosing the right individual to handle your investments. This is the best way to safeguard your money as you build your wealth.

Advisor Compensation

Fiduciary duty is often referred to as the highest duty of care. So how does your investment advisor get compensated for managing your investments while delivering this level of service? At Dowling & Yahnke Wealth Advisors, we charge a percentage of your assets under management. For the first $2 million, the annual fee is 0.85%, but the incremental fee declines as assets grow above predetermined tiers.

You may see other “fee-only” compensation structures from financial advisors. For instance, some may charge an hourly rate. You’ll be charged each time you utilize services like a consultation on a complex financial situation or a one-time portfolio review.

Other investment advisors may charge a flat fee or annual retainer. You’ll likely meet to create a financial plan and then have access to a set number of consultations throughout the year. If you want to learn more about financial planning, read our latest article titled “What is financial planning?” on our blog.

All of these fee structures are in stark contrast to how advisors who are not fiduciaries typically charge. These advisors receive a commission when you purchase specific funds or other products.  They may either get paid when purchasing or selling the stock on your behalf. The Financial Industry Regulatory Authority (FINRA) offers guidance on fair prices and commissions, most notably recommending a maximum fee of 5% per trade, depending on the circumstances.

Fiduciary vs. Suitability Rules

Part of the distinction between a fiduciary and a non-fiduciary comes down to the standard of care. An advisor with a fiduciary duty must make recommendations in your best interest, disclose any potential and material conflicts of interest, and be loyal to you.

On the flip side, other non-fiduciary financial advisors only need to abide by suitability standards. The rules applicable to these advisors are much less strict than the fiduciary standard. For instance, rather than picking an investment that’s in your best interest, it merely needs to be “suitable.” That leaves a potentially large gap for a non-fiduciary advisor to recommend an investment with a higher fee, as long as it’s suitable compared to other (potentially less expensive) available options.

The suitability standard also has fewer restrictions on disclosures of conflict of interest. And instead of ultimate loyalty being placed with the client, the advisor can opt to lay their loyalties with the party that is compensating them, like a broker-dealer.

The recent rise of robo-advisers has led to a discussion as to whether or not these automated platforms are considered a fiduciary since there’s no human overseeing client portfolios. On the subject of investments, robo-advisers are indeed ruled as fiduciaries by the SEC. However, a University of Pennsylvania Law School study questions whether regulators can truly assess whether or not robo-advisers meet these standards. The SEC has issued guidance to robo-advisers, expecting them to publish a clear explanation of how their algorithms make portfolio recommendations. Robo-advisors were also asked to review how the depth of their client questionnaires, revealing a potential weakness in learning a client’s true financial needs compared to a human advisor.

What to Ask a Financial Advisor

You should learn more about financial advisors whether you’re searching for a new one or reevaluating an existing relationship. Consider asking the following questions to get a better sense of how they operate and whether they’re required to act in your best interest while managing your financial planning.

Are you a fiduciary?

This is the clearest way to understand the ethical and legal responsibility that a financial advisor has. Don’t just expect a yes or no answer – they should also be willing to explain what the means and how the fiduciary duty applies to their investment philosophy.

How are you compensated?

Be sure to understand precisely how a financial advisor gets paid, along with the level of service you can expect to receive with that fee structure. Ask about any other fees you can expect from your investments.

Do you hold any licenses or certifications?

While it is not a requirement for the profession, many financial advisors hold a CERTIFIED FINANCIAL PLANNER™ (or CFP®) designation. While the CFP credential is a good sign that a prospective advisor may be qualified to provide sound financial advice, it does not necessarily guarantee the same. An advisor’s depth and breadth of knowledge and experience should be carefully examined to fit your particular needs. Advisors may also hold additional licenses or certifications based on their specific areas of expertise. You should search and confirm an advisor’s certification through the certifying body for verification. For example you can look up a Certified Financial Planner through the CFP Board website.

How do you communicate with your clients?

Understand how accessible your advisor will be. Find out if you have to schedule an appointment to receive advice or if you have the flexibility to call, email, or texting, with any questions you have about your financial needs at any time.

Benefits of Working with a Fiduciary Financial Advisor

You’re probably wondering, “Do I need a financial advisor?” There are several key benefits you’ll experience when working with most investment advisors. However, working with in investment advisor who is also a fiduciary advisor offers many more benefits. The first, of course, is that they are obligated to financial recommendations based on your best interest – not theirs.

Secondly, working with a fiduciary advisor will help ensure that an established level care and accountability will always be present between you and your advisor. Fiduciary financial advisors can offer a higher level of ongoing support. They can also monitor your portfolio and adjust as necessary to retain the agreed upon  asset allocation. You’ll generally find greater fee and expense transparency working with a fiduciary financial advisor to accomplish your goals. A fee-only financial advisor needs to uphold these fiduciary standards while managing your wealth.

Bottom Line

Working with a fiduciary investment advisor makes a significant difference in the way your wealth is managed. Don’t be afraid to ask questions before hiring an investment advisor. You should have a clear understanding of their services, fees, investment philosophy, and conflicts of interest among other important factors that apply to your financial goals. At the end of the day, you should be able to trust your financial advisor. By choosing one who follows the fiduciary standard, you have a much better chance of benefiting from transparent and unbiased advice.

Looking for investment advisors in San Diego? Reach out to Dowling & Yahnke Wealth Advisors for a free consultation with one of our reliable financial advisors.


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