Many words get thrown about in the financial industry and not only can it be hard to keep up, but it can also be challenging to know what they all mean and which ones apply to you. One word that is now being used often is fiduciary and a ‘fiduciary’ advisor, but how do you know when you need one and what is the difference between a ‘fiduciary’ advisor and a broker, chartered financial analyst, certified financial planner, and a certified investment management analyst?
A fiduciary is a person who is given the power to act on behalf of another and put their interests first when it comes to their financial investments. A ‘fiduciary’ advisor must act in the best interest of their client; they owe their client a duty of loyalty.
The Securities and Exchange Commission rules and the Investment Advisors Act of 1940 spell out five primary responsibilities of a fiduciary advisor which are:
Put the client’s best interest first:
The ‘golden rule’ of fiduciary duty is that a fiduciary owes a sole duty of loyalty to the investor(s) he or she serves. This is in stark contrast to the divided loyalties of a non fiduciary, such as a broker.
Act with prudence; that is, with the skill, care, diligence and good judgment of a professional:
Going well beyond the suitability requirement to have sufficient knowledge about an investor’s circumstances, a fiduciary is held to a prudent expert standard and is expected to appropriately apply generally accepted investment theories.
Do not mislead clients; provide conspicuous, full and fair disclosure of all essential facts:
While this is important in both advisory and transactional relationships, disclosures required for investment advisors are more extensive and are oriented toward factors that may influence a client’s decision to establish a long-term relationship of trust, such as business practices and conflicts of interest.
Avoid conflicts of interest:
A conflict of interest is a circumstance that makes fulfillment of a fiduciary’s duty of loyalty less reliable. Hence, battles by fiduciaries are to be avoided whenever possible.
Fully disclose and reasonably manage, in the client’s favor, unavoidable conflicts:
Certain conflicts cannot be avoided, such as when an advisor’s employer provides investment products that may fulfill important unmet investment needs in client accounts.
How Do You Know If Your Advisor Is A Fiduciary?
The easiest way to find out if your advisor is acting as a fiduciary is to ask them. If they say yes, then you should ask still to see documentation and get it in writing as they shouldn’t have a problem with this, they’re working in your best interest. If they’re not acting as a fiduciary, they won’t give you paper copies of something that says they are, because it’s a legal standard.
When Do You Need a Fiduciary Advisor?
The only way you’ll know if you need a Fiduciary Advisor is to think about what services you want from a financial professional as not all investors need fiduciary guidance. Do you know what type of investor you are? As this will help massively in identifying the best financial advisor for you.
Different investors like to do different things; some love researching investments and know precisely how they want to invest, if this is you, then you may only need help to place trades, and this doesn’t require fiduciary expertise. Then, you could be an investor who is looking for more guidance on topics such as where and how much to save for your various financial goals. If you are in this situation, then you would do well with the diligent care and broader range of services a fiduciary provides.
It is important, however, that you understand how each advisor makes their money and what value they’re providing for what you are paying them as according to Personal Capital research, more than 20 percent of investors don’t know how much they pay in investment fees; 10 percent aren’t sure if they pay fees at all. And almost one-third of Americans falsely believe higher fees mean better returns when research has demonstrated the opposite.
Where Can You Find A Fiduciary Advisor?
If you don’t know where to begin, then take a look at a website like Why Fiduciary, which will give you a tremendous amount of choice, to start with. Alternatively, look at companies like Asiaciti who have delivered specialist fiduciary and administrative services to individuals, intermediaries, and corporations for over 40 years. Reading reviews and going with someone who is well known and highly regarded in the industry is a smart thing to do, so do your homework and choose wisely.
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Hrvoje Horvat