The Importance of Working With a Fiduciary Advisor
Deciding to work with a financial advisor can be a stressful decision. It requires sharing intimate financial details with a stranger and implies a deep level of trust that takes time to build. A reasonable assumption would be that the advisor on the other side of the table is required to act in your best interest over their own. In today's fractured advisor marketplace, however, the simple truth is it is not always so. Here's why you should work with a fiduciary financial advisor.
What is a Fiduciary?
A fiduciary is a person (or entity) acting on behalf of another party who must put that party's interests ahead of their own. Typically, people who make financial, medical, or legal decisions on another's behalf are fiduciaries. Common examples of fiduciaries are found in respected professions including doctors, lawyers, and accountants. An individual acting as trustee of a trust also has a fiduciary duty on behalf of trust beneficiaries, and even corporate officers owe a fiduciary duty to their company's shareholders. In each of the preceding examples, adherence and infractions are regulated under the rule of law.
Why is a Fiduciary Important?
A fiduciary must continue to put their client's interest first, even when it may conflict with their own (i.e. compensation or related benefit). If the conflict is serious enough, it is often not allowed in the first place. For example, divorcing spouses are required to retain separate legal counsel, and medical doctors are not able to receive payments from drug companies for which they write prescriptions.
Is My Financial Advisor a Fiduciary?
The simple answer is "maybe." In practice, there are two standards of regulation applicable to financial professionals. The first clarifies that individuals or firms in the business of providing financial advice in exchange for compensation owe a fiduciary duty to their clients. It applies to many registered investment advisers, including expatwealthatwork.
The second, applicable to brokers who work for broker-dealers, is known as the suitability standard. Broker-Dealers are regulated and are in the business of trading securities for its own account or on behalf of its customers. Individual brokers are further regulated and must adhere to the suitability standard. The suitability standard means the product sold only has to be suitable to the customer's needs, not specifically in their best interest and distinct from a fiduciary standard.
Fiduciary vs. Suitability - What is the Difference?
To compare the difference of suitability vs. fiduciary standards, consider a car salesman who works for a local dealership. The car salesman needs to make sure the car suits your needs and that you qualify for a car loan if applicable. He or she does not necessarily need to ensure the car is at the best price point, that you can afford the purchase, or other relevant factors. He or she likely earns a higher commission consummate with the sticker price of the car. All this makes sense though, because the car salesman's job is to help you with this individual purchase, not advise you in other areas.
Two standards of regulations for financial professionals sounds confusing, but it was not meant to be. Mandating a fiduciary standard is meant to apply solely to advisors in the business of and compensated for giving financial advice. On the other hand, you have brokers selling a financial product to a customer. Put simply, advisors advise clients and brokers sell a product.
Why Should I Work with a Fiduciary?
As referenced earlier, forming a quality relationship with a financial advisor revolves around trust. It is much easier to build that trust when your advisor is acting as a fiduciary at all times. The regulation of financial professionals is designed for this to be the case, even if poorly enforced! A broker can help with a financial transaction in isolation, like a stock or bond trade, but a broker was not meant to give financial advice. That is the job of a financial advisor, whose fiduciary duty reflects this. Fiduciary advisors are typically only paid directly by their client, and do not earn commissions from financial product sales. When choosing a financial professional, you want to have peace of mind knowing your advisor is always putting your interests first.
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