If you’re searching for a financial advisor, you’ll want to make sure they act as a fiduciary, too.   So, what is a fiduciary and why is it important?

In simple terms, a fiduciary is merely someone who acts in your best interest.   A financial advisor acts in a fiduciary capacity when they put their clients interests above their own.

Sounds easy enough, but not every advisor does so.

Recently the Department of Labor (DOL) has expanded its definition and role of fiduciary responsibilities.  Originally the DOL focused on those providing advice to retirement plans governed under ERISA.  It is now being expanded to include advice provided on IRAs, too.   Although plans for the new ruling to go in effect have been delayed, let’s gain a general understanding of what you should expect from your advisor in their role as a fiduciary.  With or without the pending ruling, you should work with a fiduciary.

Get To Know You

Consider a typical meeting with your financial advisor.   Does she ask about your family?  Your income needs?  Your plans for retirement?  Your feelings about the market?  Does she know what’s important to you?

While you might think this is friendly banter, it’s not only important, but necessary, that an advisor understands who you are.  An advisor should make a recommendation with the knowledge that they reasonably believe it meets your financial needs, goals, objectives and circumstances.   This knowledge can only be obtained through a series of questions and an open dialogue between you and your advisor.   An advisor must make every effort to ensure that the advice is suitable to you.  The more you share with your advisor, the better informed they will be.

Suitability vs. Fiduciary Responsibility

Let’s take Bob.  He’s come in for advice.  He’s single, early 30’s, doesn’t have need for any income and doesn’t get nervous about market fluctuations.  He has extra cash on hand and would like to invest it.  He understands long term investing and is comfortable with a portfolio comprised of 100% equities.  As an advisor under the Suitability Standard, it’d be suitable to put the majority of his savings into stock mutual funds and provide a prospectus.  At the time, the advisor acting in good faith made a suitable recommendation.  The advisor would not be obligated to review his investment any further.

Take the same situation under the Fiduciary capacity.  The advisor would need to disclose any conflicts of interest.  Any fees would need to be disclosed.   Maybe in a few years, the client gets married, has unexpected health issues, or realizes he can’t stomach the ups and downs of the market.  Financial advisors should be aware of changes in a client’s objectives, risk tolerances, lifestyle, and time horizon to name a few.   They should review your investments on a regular basis.

Under the suitability method, the process can be done in one meeting.  However, for fiduciaries, it’s not just about a single investment or meeting, but establishing a continuous relationship with their clients.

Fees

An advisor can be compensated through fees or by commission, or a combination of the two.  As the DOL modifies the fiduciary regulations, the commission compensation structure will be affected, too.  If a commission product is sold, you should be informed or sign an agreement acknowledging such.  An open and transparent fee structure allows investors to more clearly identify and understand the fees they are paying for the services provided.   If you don’t understand, don’t be afraid to ask.  It’s an important part in defining the relationship between an advisor and an investor.    You want to know what you can expect for the fees you are paying.

Bottom Line

So, remember, next time your advisor reaches out to you for a review…don’t shrug it off.  This is intended for your benefit.  You want an advisor that takes a proactive approach to understanding you and staying abreast of your financial situation.    This allows your advisor to continue to offer what they believe are the best recommendations and advice for your specific situation so that you can achieve your goals and objectives.  Without your input, they can’t provide much personalized direction.  Help them help you.

Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary.  The SFA does not provide tax or legal advice. We cannot guarantee future financial results.