Part 1 of our blog series on the most important financial concept you may ever learn:
Fiduciary (fəˈdo͞oSHēˌerē).
So what is a fiduciary advisor?
An advisor that specifically takes on the legal responsibility of acting in the best interests of their clients at all times. Wait, all advisors don’t have to do this? Nope. This blog series will help you better understand what this means, why it is so important to you and how to identify the advisors that are doing it right.
Television, radio and online media is packed full of bank and investment advertising that promises to help you achieve your financial dreams by explaining to you in plain English how they will help you ‘get there’. This marketing strategy works so well because many people feel overwhelmed with the process of managing their finances and they want to talk with someone who will help bridge the language barrier.
The truth is, any advisor that is still trying to talk over your head in order to establish how intelligent they are is light years behind the curve. Explaining personal finance in a way that everyone can understand is the least we can do as advisors. But this is just one of many key elements you want to be concerned with to feel comfortable you are in good hands. The trick is to look past the slick marketing for the single most important identifier: Is my advisor a true fiduciary?
The 4 power questions that help identify an investment fiduciary:
1. Is your firm a registered investment advisor (RIA)?
The RIA is the legal structure providing the backbone of a true investment fiduciary. If the answer is yes, proceed to the next question. If the answer is no, proceed to the next advisor.
2. So you are an RIA, but are you also registered with a broker dealer?
The broker dealer allows an advisor to receive commissions, which are payments that are not necessarily disclosed to you. If an advisor is receiving compensation that you are not aware of from the investment product companies they are selling you, what are the odds those payments are not influencing the advice they are providing you?
3. No broker dealer, but do you have any separate related companies?
Some RIA firms that appear to be doing everything right try to have it both ways. This happens particularly with life insurance, where the the firm has a separate insurance business that allows them to receive commissions from the insurance they sell you. We will discuss why this is a problem later in the series.
4. Hey, will you sign an agreement that you are acting in my best interests?
Any advisor that is acting as a legal investment fiduciary will be more than happy to sign a pledge. If they won’t, that should tell you something.
Plain English is good, but understanding the importance of the fiduciary standard is critical.
Stay tuned for Part 2 of our fiduciary series.
