To find and implement the most effective strategies to manage your finances, it is highly recommended that you hire a qualified financial advisor. However, not all financial advisors are equally qualified. Advisors can differ in their educational backgrounds, level of financial expertise, and even ethical practices. Thus, you should take care when choosing one and choose an advisor who best matches your financial needs, i.e., one that places your interest before their own, offers you unbiased advice that allows you to build a secure future for yourself, and someone who you can trust with your money and rely upon to look after your best interests. Ideally, a fiduciary financial advisor would be a prudent choice to help you achieve your financial goals and objectives.
Here’s what you need to know about hiring a fiduciary financial advisor:
What is a fiduciary financial advisor?
A fiduciary financial advisor is liable to put your interests before their own. They have a fiduciary duty towards you. A fiduciary relationship is governed by an ethical code of conduct that provides an assurance that your money is in safe hands. In addition, they take a pledge to act in your best interests at all times, unlike a regular financial advisor who has not taken the same vow and may offer biased advice for individual gains.
Typically, fiduciaries work towards ensuring transparency and minimizing disputes.
Simply put, fiduciary advisors:
- Place your needs before their own
- Serve in good faith and promise to be honest, transparent, and forthright when it comes to contract terms, facts, dealings, etc.
- Divulge and minimize the impact of any conflicts that may arise
- Provide sincere financial advice
- Don’t invest your assets for their personal benefit
- Collect direct payment or fees from the client only and do not receive any commissions or kickbacks from investment firms
What is meant by fiduciary duty?
Fiduciary duty refers to the legal responsibility of a fiduciary to place his client’s interests before his own. A financial advisor governed by fiduciary duty works in your best interests to ensure monetary gains for you. In case of a breach or violation of fiduciary duty, you can file for legal action against your advisor.
A fiduciary relationship is said to be violated or transgressed upon when an advisor fails to honor their obligation. Let’s look at a few examples of such instances:
- Executing redundant transactions for the purpose of earning more commission rather than for your benefit.
- Misrepresenting financial information or transactions undertaken on your behalf.
- Carrying out unauthorized trades.
- Oversight while making transactions causing financial loss or legal troubles.
You can pursue legal action against your fiduciary in case of any actions taken by them that were not in your favor.
How to know if a financial advisor is a fiduciary or not
Take care to choose an advisor registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator when you are looking to hire a fiduciary financial advisor. Financial professionals such as stockbrokers, dealers, insurance agents, etc. are not governed by fiduciary duty, thereby, only adhere to a suitability standard i.e. he/she can provide you with counsel but not necessarily one that would be in your best interests.
With that said, you can take the help of certain associations like Garret Planning Network, National Association of Personal Financial Advisors (NAFPA), Financial Planning Association, the Certified Financial Planners Board, etc. to hire a fiduciary’s services. Tools such as WiserAdvisor’s Advisor Match Tool make use of complex algorithms to find suitable prescreened financial advisors for you in your area. These recommendations are made based on several factors like the advisor’s experience, compensation arrangement (fee-based or fee-only), licensing, and certifications.
After you’ve shortlisted an advisor that you’d wish to hire, you should vet the professional based on the following criteria:
- Certifications and licenses
- Average income earned
- Services offered by them
- Kinds of clients he caters to and their areas of expertise
- Preferred mode and frequency of communication
- A written guarantee of a fiduciary duty
You should also take care to check whether the advisor has filed Forms ADV and CRS as per SEC regulations. Filing these forms is a mandatory exercise. These forms offer an insight into various issues related to the fiduciary’s pay structure, educational background, disciplinary records, past conflicts, and more. You should also consider conducting a background check and ask for their past references. You won’t be amiss if you went for a financial professional holding any of the designations mentioned below:
- Certified Financial Planners (CFPs): CFPs are governed by a fiduciary duty and fall under the ambit of the CFP Board of Standards. These professionals practice fiduciary standards in several key financial planning areas like retirement planning, tax planning, insurance, estate planning, etc.
- Chartered Financial Consultants (ChFCs): These professionals come under the purview of the American College of Financial Services Code of Ethics and are fiduciaries as well.
- Accredited Investment Fiduciary (AIF): A professional holding an AIF certification is a fiduciary. The certification is issued by the Center for Fiduciary Studies
What are the benefits of hiring a fiduciary financial advisor?
Let’s discuss some of the most important benefits of hiring a fiduciary advisor:
- Obligated to serve in your best interests: Hiring a fiduciary advisor gives one peace of mind as the professional is governed by fiduciary duty where he or she is obligated to serve your interests before their own.
- Transparency in financial services: All fiduciary advisors have to register themselves with the U.S. Securities and Exchange Commission (SEC) which ensures that in case they do not uphold or maintain the highest standards in their dealings and be completely transparent with their clients, they can be held legally liable for breach of contract. Moreover, in case of a serious breach of trust, the professional license of the fiduciary can be revoked or he/she can even get banned from the industry as well.
- No conflict of interest in financial service: When you hire a fiduciary advisor, every possible area of conflict is discussed with you so that any or all instances of conflicts of interest are minimized and revealed to you in advance. In addition, fiduciary advisors cannot make use of your assets and investments to profit another client.
- Guide you through different phases of your financial journey: One goes through different life events such as marriage, childbirth, divorce, retirement, starting a business, etc. Each phase requires a different kind of investment approach that can be ably provided by a fiduciary financial advisor.
- Can potentially boost your savings: A major part of any fiduciary advisor’s professional expertise is to generate wealth for his/her client and maximize their savings in the long run. Plus, since their suggestions are based upon your needs and risk tolerance, they’re even more advantageous for your financial security.
Should you hire a fiduciary financial advisor?
You should consider engaging the services of a fiduciary advisor, if:
- You are looking for an advisor who places your interests before their own, offering you honest financial advice and investment opinions.
- You want an expert opinion that covers your entire investment portfolio rather than simply a specific investment or financial product.
- You are looking to work towards the fulfillment of a specific financial objective such as estate planning, retirement planning, tax saving, etc.
- You are more open to paying for financial advice directly rather than through commissions.
One should be extremely cautious when it comes to trusting someone with your money. By hiring a fiduciary advisor , you can rest assured that your money is in safe hands. Since a fiduciary is legally bound to place your interests before their own, you can have peace of mind when it comes to your funds.