What is a Fiduciary Financial Advisor? 

What is a Fiduciary Financial Advisor? 

Some financial advisors are financial fiduciaries and some are not. It is arguably important to know which type you are interviewing when you are seeking a financial professional to assist you in managing your financial future.  

This article will answer several important questions about the fiduciary status of financial  advisors:  

What does it mean to be a financial fiduciary?  

Who are financial fiduciaries?  

Are all advisors financial fiduciaries?  

What is a dually registered financial advisor?  

How can an advisor’s fiduciary status impact expertise?  

Why do financial fiduciaries often have fewer conflicts of interest?  

How can investors benefit when they work with a financial fiduciary? 

What does it mean to be a financial fiduciary?  

A fiduciary is a person who holds a position of trust. Trust has particular significance in the financial service industry because financial advisors are in a position to influence or control the investment decisions of their clients.  

Financial fiduciary advisors are required, by industry regulations, to always put their client’s financial interests first. In other words, their financial advice should always benefit their clients.  

A fiduciary is expected to meet the highest ethical standards in the financial service industry. A lower financial industry standard is called suitability. The suitability standard means financial professionals are expected to make suitable recommendations based on their detailed knowledge of their client’s circumstances, risk tolerance, and goals. This standard is believed to be lower and subject to significant interpretation. Perhaps most importantly, financial professionals who are held to a suitability standard are not always required to put their client’s financial interests first.  

You might think there is a black-and-white distinction between doing what is best for clients and what is best for financial advisors. It might be murkier than you would think given that there can be an overlap of the standards by which financial professionals are bound.  

At ViaWealth, we serve as your financial advocate to help you pursue your financial goals.

Who are financial fiduciaries?  

There are four defining questions we feel you should ask financial advisors before you  sign their service agreements:  

● Are you acting in a fiduciary capacity when you provide investment advice and services?  

● Are you a registered investment advisor or an investment advisor representative?  ● Are you compensated with advisory fees or sales commissions when you provide financial services? 

● Do you sell any investment or insurance products for commission? 

Financial fiduciaries with the fewest conflicts of interest will likely answer the four questions as follows: Yes, Yes, Fees, and No. 

Are all advisors financial fiduciaries?  

A financial advisor is a title that doesn’t necessarily infer the advisor’s fiduciary status. In fact, anyone can call themselves a financial advisor just like anyone can claim to be a financial planner whether they have the specialized skills or not.  

As noted in response to the previous question, a financial fiduciary has two unique characteristics.  

First, they are registered investment advisors (firms) or investment advisor representatives (professionals who work for firms). Based on industry regulations all registered investment advisors and investment advisor representatives are financial fiduciaries.  

Second, the standard method of compensation is a contractual fee when they provide financial advice. Registered investment advisors and investment advisor representatives are generally acting in a fiduciary capacity when they provide financial advice for fees.  

There are several types of fees. A very popular fee type is an asset-based fee which is a percent of client assets. A common fee is 1% of the market value of a client’s assets.

There is also a fixed fee and a subscription fee. The fixed fee is usually charged once – for example, a $2500 fee for a financial plan. The subscription fee is recurring – for example, $300 per month for planning services.  

Some advisors may also charge hourly fees for planning services that are similar to the way CPAs and attorneys charge for their advice and services.  

Any advisor who is compensated with a sales commission by a product sponsor is not acting in a fiduciary capacity for you when they provide planning and investment advice.  

What is a dually registered financial advisor? 

As the title implies, this advisor can provide investment advice for a fee and sell investment or insurance products for a commission. Hence the term “dual”.  

These advisors are acting in a fiduciary capacity when they provide financial advice for a fee, but are not acting in a fiduciary capacity when they sell investment or insurance products for commissions.  

This is an important distinction that should be communicated to you in writing so there is no confusion about the advisor’s fiduciary status based on the method of compensation.  

How can an advisor’s fiduciary status impact expertise?  

On the one hand, an advisor’s fiduciary status doesn’t necessarily have anything to do with the advisor’s expertise. A fiduciary advisor and a commission sales representative could both be MBAs with 20 years of financial service experience.  

On the other hand, if an advisor is a CERTIFIED FINANCIAL PLANNER™,  then that advisor may have had more training on planning topics. A high percentage of CFPs (R) provide planning and investment advice for fees and are financial fiduciaries.  

Why do financial fiduciaries often have fewer conflicts of interest?  

Let’s describe a conflict of interest as financial advice that benefits the advisor more than it does the advisor’s clients. For example, the advisor recommends a proprietary investment product because it pays a higher fee or commission to the advisor.  

We have already described how financial fiduciaries are held to higher ethical standards than advisors who are paid commissions to sell investment and insurance products.  Their fiduciary status is another layer of protection for investors who rely on financial advisors for trustworthy advice.  

How can investors benefit when they work with a financial fiduciary? 

1. Financial fiduciaries are generally required to provide more disclosure on their websites, in their marketing materials, and in their service agreements.  

2. Financial fiduciaries typically will have fewer potential conflicts of interest and are under increased scrutiny to disclose any potential conflicts.  

3. You pay the financial advisors fees for their knowledge, advice, and services.  The same way you pay other professionals (CPAs, attorneys). Commission sales  

representatives are paid by third parties (mutual fund families, annuity companies) and are less likely to be product neutral.  

4. There is no guarantee a fiduciary advisor has more planning and investment knowledge than a non-fiduciary. However, there is a reasonable probability that the fiduciary advisor might be better equipped to handle more complex financial situations.  

Conclusion  

Prudent investors, particularly those who have accumulated substantial assets should be well-informed with selecting their financial advisors. Not all financial professionals are held to the same standard, and many feel that financial fiduciaries offer very distinct advantages to investors that are difficult to dispute. The greater an investor’s net worth, the greater the investor’s need for financial advice they can trust.

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.

More about the author: Reid Larson

Reid is the Managing Member and Founder of ViaWealth LLC.

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