Fiduciary. This word has been around for a long time, but it’s still not clear to many what it actually means. A fiduciary is someone who acts in the best interest of another person. Being a fiduciary is about loyalty, honesty and trust. Sounds simple, right? Unfortunately, not all financial professionals are fiduciaries. You should never work with a financial expert who is not a fiduciary. See below for more detail on this topic.
How do I know if a financial professional is a fiduciary?
Ask. It’s absolutely okay to ask a financial professional if he/she is a fiduciary before you spend the time getting to know each other. Not only is it okay, but it should one of the first questions you ask. Another clue would be if you see “CFP”, “ChFC” or “AIF” behind their name. All of these professional designations require the person holding the designation to be a fiduciary. Another sign of a fiduciary (and a good advisor) is someone who is diligent in learning all about you and your financial background so relevant context can be used when making recommendations.
You may have been taught it is rude to ask people about their compensation. Forget this rule when hiring a financial professional. Definitely ask how a financial professional is paid. Fiduciaries do not earn commissions or trading fees. Their compensation is independent of the types of products or accounts they recommend.
Keep in mind, just because someone is a fiduciary does not mean they are experienced or trustworthy. Trust your gut.
What are the risks if I work with someone who is not a fiduciary?
A big risk of not working with a fiduciary is that the financial professional does not disclose conflicts of interest. For example, you may be recommended a product or account because the professional gets a better commission on that particular product (rather than the product that is the best solution for your situation). Non-fiduciaries can find other ways to bump their compensation as well. For example, making several unnecessary trades to trigger additional commissions.
What else should I know on this topic?
One of the questions you can ask that will give you a feel on the advisor’s approach is “How would you manage this if it was your mom and dad’s account?” Also, ask specifics on how the advisor makes recommendations and monitors your investments. There should be a well thought out process, and it should make logical sense to you. The advisor should also have a process to connect with you over time because he or she has your long-term best interest as the top priority. On that same note, a fiduciary should challenge you if he or she disagrees on an investment request you make. If the advisor believes this choice would have a significant, negative impact on your overall financial health, the advisor should communicate just that. A good advisor who strongly believed the requested investment would put you at significant risk would not make the transaction.
Be on the look-out for a future blog addressing the top questions you should ask before hiring a financial professional.
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