What is a Fiduciary Financial Advisor?
A fiduciary financial advisor places their client’s interest above their own. By doing so, the fiduciary is prohibited from earning commissions on the sale of products or presenting products that might create a conflict of interest between advisor and client. Rather, the fiduciary financial advisor will charge a fee for the services they provide.
Generally speaking, the fee structure of a fiduciary financial advisor and is one of two models:
Assets Under Management – (Multiply the number of assets managed by the advisor by a percentage to arrive at the fee); or
Fee-based – (Based upon a flat fee, hourly or special project type of model).
These two fee structures ensure that the advisor is not incentivized to sell the client products for a commission. The fees are transparent, and so are the intentions of the advisor.
What is regulation “Best Interest”?
If a financial advisor is not a fiduciary, it is reasonable to assume that the advisor is being governed by the “Best Interest” rule. Generally speaking, these will be brokers who earn commissions by selling their clients financial products (equities, mutual funds, insurance, annuities, etc.).
Regulation “Best Interest” allows for the sales of products, as long as the fees and potential conflicts are disclosed. This effectively places the onus on the client to read the documents. This creates a kind of cat-and-mouse game where if a broker wants to sell you a product that may not be in your best interest, they are able to do so as long as the commission and/or conflict is disclosed in that large stack of documents you sign prior to leaving their office.
How can you tell the difference?
Almost anyone can call themselves a financial advisor, financial planner, investment advisor, etc. These names by themselves do not really mean anything. Look beyond their title, and research their professional qualifications, business structure and professional affiliations. Are they a CFP®, CFA or have they earned some other distinction that proves their experience and expertise? Are they structured as a Registered Investment Advisor (RIA)? Are they a member of NAPFA (National Association of Personal Financial Planners)? If you have done your research and can confirm your financial advisor can answer “Yes!” to all three of the questions above, then you are more than likely dealing with a fee-only fiduciary financial advisor that will place your interest above their own.
But when in doubt, simply ask, “Are you a fiduciary?” If the answer is longer than 1 word (i.e. “Yes”) you have two options: 1) make sure you have your reading glasses handy when you go through their documents, or 2) find another financial advisor.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.