A fiduciary advisor is one who has signed a legal agreement ensuring they act only in your best interests. While this seems like it should be the standard in the financial industry, unfortunately the majority of advisors only have to follow a much looser “suitability standard” giving them vast leeway to recommend investments that are better for them instead of you.
Making sure your advisor is acting as a fiduciary at all times is vital.
Why is working with a fiduciary advisor important?
In the same way you trust your doctor to only give you the best advice they can give you, you should be able to expect the same from your advisor. You don’t want your doctor recommending a prescription just because they are paid to recommend it, you only want advice that is in your best interests.
If you have the same belief about your financial goals and dreams, you need to be working with a fiduciary advisor.
What is a “fee-only” advisor?
According to Forbes.com “Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.”
Are there differences between “fee-only” and “fee-based”?
Yes there are big differences. Fee-based vs fee-only can be a confusing distinction with many variations. However, the key is a “fee-based” advisor is someone who can either sell you commissioned based products and/or work with you on a fee basis.
This makes it difficult for a client to know when the advisor is working as a commissioned salesperson and when they are working as a fiduciary in your best interest.
Why are commissions such a bad thing?
Commissions themselves are not a problem. But it is the conflicts of interest they create between the advisor and the client that become problematic. Most clients are expecting their advisor to give them the best advice, investments, and strategies out there.
However, many times these investments pay less in commissions, giving the advisor less of an incentive to recommend a better product over one with higher commissions. In fact, under current regulations, advisors do not even need to tell you about a better, less expensive investment. They are free to only talk about a higher commissioned product.
How do I know if my advisor is fee-only?
The simplest way is to just ask. However, many advisors, especially those who are “fee-based” are very good at talking around the specifics of when they are working on a fee basis vs a commission basis.
Make sure you sign an advisor/client agreement stating the advisor will always be working as a fiduciary and requiring them to disclose any commissioned products they may be recommending.