You may have heard a lot in the press lately about financial advisers and whether they act as a fiduciary. So, what does it mean? Basically, it means your adviser is required to act in your best interest, and not their own. That’s it! Seems simple, right?
Ask your adviser if he or she is a fiduciary.
Not so. For starters, not all advisors are fiduciaries nor are they required to be a fiduciary. There are financial professionals who are only required to act under a suitability standard. This means, the adviser need only have adequate reason to believe a recommendation is suitable for their client. In this situation, it is possible a conflict of interest may exist. That is, when deciding between investment options, if one choice pays the adviser a better commission, the adviser may select that option believing it suitable for their client. It doesn’t mean that the adviser (or the investment) is necessarily bad, it just means a conflict exists. In dollars and cents, it means you as the client may end up paying more for your advice and investment.
Under a fiduciary standard, an adviser uses a well thought out and prudent process. Conflicts of interest must be disclosed. They will also discuss their choices with you in detail to be certain you understand the recommendation, the rationale behind it, and provide you ample opportunity to ask questions. This way there is no misunderstanding about the choices being made or the logic behind those choices. A fiduciary adviser looks beyond short-term commission and puts the client’s best interest first. Keep in mind that the Securities and Exchange Commission also regulates registered investment advisers that claim to be fiduciaries.
When seeking financial advice, do your homework and know that there are two types of advisers out there. Be direct and ask your adviser if he or she is a fiduciary. The answer should be a simple yes or no. If you do pick an adviser that is not a fiduciary, just understand upfront what the costs and conflicts may be. Again, it’s not a ‘bad guy’ vs. ‘good guy’ but knowing who and what you are paying for in advance. This will help avoid conflict, maybe save some money, and reduce stress from the beginning.
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