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What Is A Fiduciary Financial Advisor and Why Do You Need One?

What Is A Fiduciary Financial Advisor and Why Do You Need One?
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Financial advisors for successful professionals, executives, and business owners.

If the prospect of Excel spreadsheets, budget tables, and monthly portfolio statements bore you to tears, you might be wondering, “Do I need a fiduciary financial advisor?” Managing and planning your financial life isn’t easy. It’s more difficult now as inflation rises and market forces remain unpredictable, shattering more than one dream of long-term wealth and a comfortable retirement.

Stocks, ETFs, bonds, mutual funds, crypto. There are so many options for growing your net worth and preserving your financial future that it can be overwhelming. One thing is sure, though – not investing wisely and early could be the difference between sitting on a Hawaiian beach during retirement or working as a greeter in a discount department store well into your old age. If that prospect isn’t particularly appealing, it’s time to seek a fiduciary financial advisor.

Table of Contents:

Finding a Financial Advisor: Understanding the Industry Landscape

Not everyone within the wider financial advising and planning spaces is created equally – designations and titles matter in this industry. For example, though they may sound the same to a layperson, a financial advisor and financial services professional offer vastly different experiences and have equally varied experience and industry expertise. 

So, to get started on the right foot, you’ll need to know which potential financial advisor is worth engaging with in the first place. That’s where nationally and globally recognized credentialing comes into play. While not exhaustive – nor do these titles alone make a quality financial advisor – starting your search by narrowing the playing field to these well-known and respected titles is the best way to avoid scams, questionable expertise, and potential loss of capital. If nothing else, these titles mean the holder has some degree of academic and practical knowledge in their respective financial fields:

  • Certified Financial Planner (CFP)
  • Chartered Financial Analyst (CFA)
  • Certified Public Accountant (CPA)
  • Investment Advisor Representatives (IARs) 

What Is a Fiduciary Financial Advisor?

But don’t let your search for a financial advisor stop at one of those acronyms slapped onto the end of their name. You’ll also need to ensure the financial advisor operates as a fiduciary

A fiduciary must legally operate within your (the client’s) best interests. That means a fiduciary financial advisor must consider all of your unique circumstances when managing investments or providing financial advice and only recommend courses of action they would take if they were in your shoes.

The Difference Between Fiduciary Financial Advisors and Brokers

Fiduciary financial advisors are regulated by the SEC. Non-fiduciary financial advisors, or brokers, are regulated by FINRA (Financial Industry Regulatory Authority).

The SEC’s interpretation of ‘fiduciary duty’ can be broken down into six main aspects:

  1. Act in the best interest and utmost good faith of clients.
  2. Refrain from personal securities transactions inconsistent with client interests.
  3. Provide full and fair disclosure of all material facts.
  4. Provide personalized, suitable investment advice.
  5. Seek the best execution of a client’s transactions.
  6. Provide financial advice and monitoring of client accounts in perpetuity.

Compare this with an advisor that is NOT a fiduciary, but is instead held to the suitability standard, as defined by FINRA, the regulating body for brokers:

  1. Ensure that recommendations suit some investors based on due diligence.
  2. Match recommendations to a customer’s investment profile.
  3. Ensure that brokers’ transaction series is not excessive for the customer’s profile.

There is a major gap between the fiduciary standard held by fiduciary advisors and the suitability standard held by brokers. It is important for anyone that is going to work with a financial advisor to understand this difference. 

The fiduciary legal obligation extends beyond asset class selection or other basic actions. The SEC takes fiduciary responsibility very seriously, and a quick search finds multiple violators facing steep penalties for breach of fiduciary responsibility, including:

  1. Offering clients “higher-cost mutual fund share classes than were otherwise available.”
  2. Sticking client cash in “cash sweep money market funds for which [the violator] received revenue sharing.”
  3. Investing client funds in “leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks.”

These three cases show how strictly defined fiduciary duty is and how simple it is to violate the ethical duty. In these cases, violations were as diverse as not selecting the cheapest fund, profiting off client cash without disclosure, and simply investing in a product that was too risky without sufficient understanding or notification. The fines in these cases ranged from $195,228 to $5.8 million – showing that the SEC takes fiduciary obligations very seriously.

Non-Fiduciary Financial Experts

A broker is not a fiduciary – this is an important distinction because, of the many financial professionals offering services today, the vast majority are designated brokers rather than fiduciaries. They must only provide a suitable investment product, not necessarily the best one for your unique circumstances. Brokers also get paid via commission or fee for selling some financial products, so an inherent conflict of interest arises when the “suitability” bar is relatively low.

Likewise, dual-registered advisors may appear fiduciaries but often aren’t. The dual-registered designation means that they are registered with both the SEC and FINRA (confusing, I know). 

As such, they can promise to act in your best interests while simultaneously offering commission-based financial products while wearing their “other hat.” Shady business!

Identifying a Fiduciary

The easiest way to tell if an advisor is a fiduciary or not is to follow these simple steps:

  1. Go to https://brokercheck.finra.org/
  2. Search for a specific financial advisor
  3. Check whether this individual is an investment advisor (SEC registered and a fiduciary), a broker (FINRA registered), or both (a wolf in sheep’s clothing)
Ryan Hughes Investment Advisor Brokercheck profile
Example of a true fiduciary financial advisor.

What About Robo-Advisors?

As artificial intelligence trends accelerate, more and more name-brand brokerages and independent startups are offering a new, tech-centric alternative to financial advisors: robo-advising

In a nutshell, robo-advisors use algorithms and statistics to determine how to best put your money to work. This is done with advanced AI, which picks the best investments based on questions you answer, such as risk tolerance, time to retirement, and others. Robo-advisors vary from firm to firm, so it’s best to check the service’s performance before committing.

The primary upside is that, since the AI can digest and act on data much faster than humans across many portfolios, the robo-advisor can react to market news or rebalance your portfolio much more quickly than a traditional advisor.

A core downside is that you lose immediate access and feedback to discuss your finances. Robo-advisors generally work within particular investment niches rather than offering a slate of services like a quality fiduciary financial advisor, so you’ll still need to source financial planning, estate management, tax planning, and similar non-investment money matters elsewhere. 

Likewise, costs associated with robo-advisory services tend to be steep. One popular independent service charges 0.25% of your total assets under management, which seems decent – until you realize your cash is exclusively invested in high-fee mutual funds, eating into your gains beyond just the intro fee.

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Financial advisors for successful professionals, executives, and business owners.

How Much Does a Fiduciary Advisor Cost?

Nearly all fiduciary financial advisors are fee-only, meaning you pay a specified rate based on differing criteria, and they don’t collect any cash from peripheral actions like asset class commissions. Fee-only fiduciary advisors typically fall into one of three buckets:

  1. Flat Fee: you’re charged a fixed cost for a one-time project, no matter your net worth or total assets managed.
  2. Subscription or Retainer Fees: you pay an ongoing fixed rate for planning services, portfolio management, or both.
  3. AUM Fees: Assets under management-based fees are a variable percentage rate based on the total capital invested with the advisor (i.e., 1% of AUM).
  4. Hourly Fees: Much like you would pay an attorney, some advisor will provide work on an hourly basis for any services rendered. 

Brokers make money via commissions and can also charge other types of fees (AUM, flat fees, etc.). The is a somewhat nuanced topic at first glance, so be sure to get a solid answer on how your financial advisor makes their money before committing. A proper fiduciary will be happy to lay out the details; if not, it may be a case of the advisor having something to hide. 

From Fiduciary to Financial Lifeline

You aren’t alone if you’re overwhelmed with the innumerable – and ever-evolving – financial products, schemes, gurus, and sales pitches. Worrying about managing your net worth, let alone far-flung retirement and generational wealth plans, can be a constant source of stress on its own and compounded by trying to separate potential fraud from those truly working to improve client financial positioning. 

That’s why the fiduciary distinction is key. Identifying a true fiduciary helps separate wheat from chaff and is the first step toward building a long-term, fruitful financial relationship.

Remember, though, that a fiduciary designation alone isn’t always sufficient – you’ll still need to have a good rapport with your financial advisor and ensure that their overall ethos and mission align with your financial goals and risk tolerance. To see the next steps toward building a long-term relationship with a quality financial advisor, check out our 10 Questions to Ask Every Financial Advisor Guide:

10 Questions To Ask Every Financial Advisor

We know that finding the perfect financial advisor can be intimidating. You may have the following questions in mind, “How do I know if an advisor has my best interest at heart? Are there any hidden fees? Do they even know what they’re doing with my money?” We have created this guide to simplify the process and to help you along the way. Download now to avoid the biggest mistakes people make.

    Frequently Asked Questions about Fiduciary Financial Advisors

    Is a fiduciary financial advisor better than a non-fiduciary?

    While there’s no set rule, generally, typical clients will be better off with a fiduciary rather than a non-fiduciary, especially if you’re looking for guidance and advice. After all, you would want a non-biased person assisting you (instead of seeking a commission from a sale).

    If there are specific products you’re interested in, like an annuity or a life insurance policy, a non-fiduciary may have additional insight. But remember, they’ll be profiting off of your investment beyond any basic fee charged. 

    Does Fidelity or Charles Schwab offer fiduciary financial advising services?

    No. Fidelity’s disclosures clarify that they do not: 

    “We do not have a fiduciary or advisory relationship with you and our disclosure obligations are more limited than if we did.”

    The same can be true for Charles Schwab – they are a large brokerage firm that is not beholden to the fiduciary standard. 

    However, there is a big distinction one must take – a fiduciary advisor may use Fidelity or Charles Schwab as their custodian for their clients. This means that a Registered Investment Advisor (RIA) can be a fiduciary advisor and use a discount brokerage firm like Fidelity or Charles Schwab as a place to hold their clients’ assets. 

    The big difference here is that Fidelity and/or Schwab is not providing the advice – they are only acting as the custodian. 

    Does Edward Jones or Morgan Stanley have fiduciary advisors?

    No. Both Edward Jones and Morgan Stanley are broker dealer firms and their advisors (brokers) are not held to the fiduciary standard – they are only held to the suitability standard. This means that as brokers, they only have an obligation to make sure that any investment products they recommend to you is suitable, not necessarily in your best interest.

    Do banks like Bank of America/Merrill or Wells Fargo have fiduciary advisors?

    No. Banks are also broker dealers, even though they have a retail banking arm that their counterparts (Edward Jones, Schwab, etc.) do not. Their advisors are brokers that are all compensated for selling financial products to their clients. As such, they are not held to the fiduciary standard, but rather the suitability standard. 

    Where can I find a fiduciary financial advisor?

    If you read this article in its entirety, you should be well-equipped to find and analyze a fiduciary advisor.

    Naturally, we fit the above-mentioned criteria at Bull Oak and would be happy to talk with you if you match our ideal client persona. While we work with a wide range of people from wealth accumulation to retirement, we primarily serve working professionals and executives. We believe data-driven planning and pragmatic investing provide the best opportunity for financial success.

    Learn more about us here or schedule an appointment with an advisor.

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