Selecting a financial advisor is difficult. Doing it well requires that you wrestle with some difficult questions. What should you expect from your advisor? How can you accurately evaluate an advisor’s expertise when you don’t have the expertise yourself? Most important of all: how do you know if this is someone you can trust? While some of these questions can only be answered with time and experience, you can boost your confidence in the search process by narrowing your selection to advisors who are fiduciaries.
The universe of financial advisors can be divided between those who are fiduciaries and those who are not. Being a fiduciary means you are bound by two related duties: the duty of care and the duty of loyalty. The duty of care means that you will act with professional competence and in the best interest of the client, including in client transactions and ongoing financial advice. The duty of loyalty means you will put the client’s interests ahead of your own and disclose any conflicts of interest.
Non-fiduciary advisors do not face these same requirements. They adhere to a “suitability standard” which allows them to recommend financial products or services that are “suitable,” but may not be the best for you. In 2019, the Securities & Exchange Commission implemented Rule BI which seeks to impose a “best interest” standard on the conduct of retail brokers. However, Rule BI does not make a broker a fiduciary.
A significant benefit of working with a fiduciary financial advisor is peace of mind. You can trust that your fiduciary advisor will take the time necessary to ensure that any recommendations fit with your goals and values.
Another benefit of working with a fiduciary advisor is that they are required to disclose potential conflicts of interest that arise in the course of your relationship. Some conflicts of interest are obvious; others are more nuanced. For example, clients sometimes ask if they should pay off their mortgage or invest the money instead. Since I charge a fee based on the assets I manage for them, I would personally do better if they were to invest the money. However, as a fiduciary, I disclose that conflict of interest and then complete an analysis to determine which choice is right for the client. Anything less would be a violation of my fiduciary duty. This kind of transparency helps build trust between me and my clients and ensures that my clients are fully informed about any potential risks associated with their investments.
Perhaps one of the most important benefits of working with a fiduciary advisor is the level of expertise and experience that they bring to the table. This is especially true for those who have earned the Certified Financial Planner® designation. CFP® professionals must undergo extensive training and education to earn and maintain that designation. They have a deep understanding of financial markets, investment strategies, and financial planning techniques that can help clients achieve their financial goals.
Here are a few ways to determine if a financial advisor is a fiduciary:
Ask: The easiest way to determine if your financial advisor is a fiduciary is to simply ask them. If they are a fiduciary, they should be able to provide you with a clear answer and explain what that means.
Check their credentials and professional designations: Fiduciary financial advisors are registered with regulatory organizations like the Securities and Exchange Commission (SEC). You can check the SEC websites to see if your advisor is listed as a Registered Investment Advisor (RIA). CFP® professionals are required to be fiduciaries.
Review their Form ADV: Registered investment advisors are required to file a Form ADV with the SEC or state securities regulators. This form provides information about the advisor's business practices, including whether they act as a fiduciary.
Look for conflicts of interest: If your financial advisor receives commissions or other compensation from financial products they recommend, they are probably not a fiduciary.
Read their service agreement: Before working with a financial advisor, make sure to review their service agreement carefully. Look for language that describes their fiduciary responsibilities and any potential conflicts of interest.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to: email@example.com