The term Fiduciary has become more prevalent in recent years due to the latest regulation changes. Dodd-Frank Act, SEC’s Regulation Best Interest, and DOL’s Fiduciary Rule are all examples of recent legislation attempts at defining the roles and responsibilities of financial advisors. However, we believe the main issue is that the aforementioned rules sometimes only pertain to certain types of financial professionals, and it becomes confusing for the general public to determine when the specific regulations are applicable.
The Role of a Fiduciary
Being a Fiduciary means the professional is required by law to act in the best interest of their clients. Many industries can use the term, but it is usually pertaining to a financial professional. A Fiduciary is only allowed to make recommendations that will benefit the client, and they must follow procedures to avoid conflicts of interest. They must perform their due diligence to ensure every recommendation is the best possible suggestion, and they must ensure the client fully understands the investment before moving forward. You can trust a Fiduciary and their recommendations because, by law, they must be in your best interest.
The Role of a Financial Advisor
Some financial professionals only follow the suitability guidelines, which means the recommendations have to be “suitable” for the client. It does not have to be the best suggestion, but it must be suitable for the client. There is a lot of gray area with this rule, and it allows the professional to create recommendations that may benefit them personally via increased commissions. This recommendation may suit the client, but why would they want it if there was something better? Luckily, the government is taking steps to protect the average American investor by requiring more and more professionals to act as Fiduciaries. The goal would be to hold all Financial Advisors to this higher standard of conduct to help ensure every investor is receiving the best advice possible.
Working With Someone You Trust
A few key steps can be taken to ensure you are working with a Fiduciary you can trust. Registered Investment Advisory (RIA) firms and their advisors are all held to the Fiduciary level. Additional audits are required by the state or Securities and Exchange Commission (SEC) to ensure these firms are in accordance with the ruling. CERTIFIED FINANCIAL PLANNER™ professionals are also held to a Fiduciary standard. This designation requires professionals to abide by the Code of Ethics and Standards of Conduct outlined by the CFP® Board. On top of being a Fiduciary, it is still important to find a professional you enjoy working with and one that you can trust on a deeper level. Would they still hold your interest above their own if they were not legally required to? If the answer is not a resounding YES, then perhaps you should continue looking for a trustworthy advisor.
Fiduciary vs. Financial Advisor: Key Takeaways
- A Fiduciary is a professional individual or organization that is required to act in the best interest of their clients.
- A Financial Advisor is an individual who solicits or provides insight and recommendations towards a client’s financial goals.
- A Financial Advisor is not always a Fiduciary, so it is essential to do your research and hire a professional you can trust. Some professionals are more concerned with their commissions rather than what is best for the client.
Have More Questions?
If you have any questions about our fiduciary responsibility, taxes, your individual investment portfolio, our 401(k)-recommendation service, or anything else, please call our office at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation, please give us a call to discuss it.
We hope you learned something today. We would love to hear any feedback or suggestions if you have any feedback or suggestions.
Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, James D. Wink, and James C. Baldwin