How To Know If A Financial Advisor Is Fiduciary BF Blog

How To Know If A Financial Advisor Is Fiduciary

Seeking financial and investment advice can seem daunting when you do not know whom to trust. You can try to educate yourself by reading financial information, but it can be overwhelming when there is so much to learn. At first, you may need to understand how to budget, your spending habits, and how to save. Finally, you must find and learn about various investment products. Financial professionals can help with this process. You may need to start with a financial planner for budgeting and spending habits. However, for savings and investing you may need more long-term financial advice. However, how do you determine if their financial advice is in the client’s best interest? How to know if a financial advisor is fiduciary and will work to benefit their clients rather than themselves.

Let’s delve into the need for a financial advisor and/or planner and how to determine if the advice you are receiving is in your best interest. How important is it for a financial advisor to operate by a fiduciary standard? Should the planner be a certified financial planner? Is it required that they be a registered investment advisor?

Financial Planners

If you are not very good at budgeting, saving, and investing a financial planner may be the best place to start. The Financial planner will guide you from budgeting to investing. They will review your entire financial plan.  This will include budgeting, taxes, and investing. They will review your income, your spending habits, and your long-term goals. Financial planners will provide a comprehensive plan to help their clients achieve their financial goals. These goals should consist of an emergency fund, sinking funds, college funds, and retirement funds as part of the financial planning process. Each of these funds serves the purpose of creating a comprehensive budgeting, saving, and investment strategy based on their client’s current and future needs.

Financial Advisors

If you happen to be in a good place financially. This means you have paid down your credit card debt, you have an emergency fund, and your 401k plan is maxed out. You have some additional discretionary income that you wish to earmark for college or additional retirement savings. You may need some help with developing an investment strategy to meet these long-term goals. A financial advisor will take into consideration your lifestyle, goals, and risk tolerance. To be successful they must be able to understand and analyze market trends based on the past performance of various financial products in order to provide sound investment management.

There are fiduciary and non-fiduciary Advisors. A non-fiduciary advisor may operate under the suitability standard which only requires that they recommend financial products for the investor’s financial situation.  Hence, it allows the broker to recommend an investment product that could be more costly to the investor but generates a higher commission than a comparable product at a lower cost to the investor. This type of advice has potential conflicts of interest between the investor and the financial institution as they are paid a commission or fee based on the products they suggest. Finally, a financial advisor may charge fees for their services, which could be a percentage of the assets, an hourly rate, or a flat fee. Therefore, they could be acting in good faith when dealing with their clients. However, be very careful.

Therefore, where and how you invest your money is a big decision and you need to work with a financial professional that works in the best interests of their clients. Let’s look at the role of a fiduciary financial advisor.

Fiduciary Financial Advisors

Fiduciary financial advisors must operate within the fiduciary duty. This fiduciary duty dictates that the financial advisor has a legal responsibility to act solely in the best interest of another party. Per Investopedia, a “Fiduciary” is a person or organization that acts on behalf of another person or persons, putting their client’s interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interest.

Therefore, the fiduciary relationship is one based on serving the client first. Many of the fiduciary advisors are fee-only advisors. This means that these fee-based advisors only accept payments from their clients. Hence, there is no conflict of interest in receiving a sales commission from a large financial institution.

The fiduciary duties of your advisor should ensure that they recommend financial products in good faith that serve the best interest of their clients. They are obligated to have a duty of care for their clients as well as a duty of loyalty. This duty of care and loyalty places your interests above any personal financial incentives.

CFP Board

The Certified Financial Planning Board (CFP Board) sets, administers, and enforces the certification standards. The financial planner must pass the CFP exam to become a certified financial planner.  Here is the CFP Board’s Code of Ethics and Standards of Conduct. Take a moment to review this code of ethics.

SEC

The Securities and Exchange Commission oversees securities exchanges, securities brokers and dealers, investment advisors, and mutual funds to ensure fair dealing, and reporting of market information, and to stop fraudulent practices. The SEC works to protect investors by deterring misconduct, holding offenders accountable, and providing resources to help you evaluate investment choices.

The SEC has the power to register, regulate, and oversee investment firms, public companies, brokerage firms, transfer agents, and clearing agencies as well as the nation’s securities self-regulatory organizations (SROs). They also can regulate the accountants that provide services to these companies. They make every effort to detect potential misconduct, issues, and problems in the market early enough to prevent violations of federal securities laws.

The SEC is a national government agency that has a Division of Enforcement made up of a police force that enforces their regulations. However, they do not have the authority to start a criminal case.  Hence, they will work with the FBI and the Department of Justice during a criminal investigation.

Finding A Fiduciary Financial Advisor

In other words, it is a great idea that you seek out the services of a registered investment advisor so that you can be protected by the SEC.

The good news is that there are various Apps and organizations that can help you find a Fiduciary Financial Advisor. BankrateSmartAsset.comNational Association of Personal Financial Advisors (NAPFA), and MyPerfectFinancialAdvisor.com all offer an advisor matching tool to help you. However, a good starting point is to check the SEC’s advisor search tool to determine if the advisors on your research list are fiduciaries.  Once you selected your top 3 to 5 candidates begin interviewing them for the job.

Here are some questions you should ask each of the candidates you are considering:

  1. Are you a fiduciary?
  2. Are you a certified financial planner? What are your credentials?
  3. Do you invest in and update your own financial education?
  4. How are you paid? Are you a fee-only fiduciary advisor?
  5. How will you help me stick to my financial goals when there is an economic downturn?
  6. How does your firm measure your performance as a financial advisor?
  7. What happens if you change companies?

These are starter questions. You can ask additional questions regarding your specific needs and aspirations.  Their answers should be able to manage your expectations. Therefore, you should be left feeling confident in their ability to help you achieve your financial goals and secure your financial future.

Red Flag Indicators

Red flags are indicators that a potential financial advisor may not have the client’s best interest in hand vs. achieving their own financial goals. They could be under pressure from their brokerage firms to present certain products from specific insurance companies to maximize profit. Whatever the case take into consideration these common red flags.

Red Flags

  1. They’re always talking about short-term returns.
  2. They’re pushing annuities or variable insurance products.
  3. They try to convince you they can beat the market.
  4. They brag.
  5. They’re unresponsive or take too long to reply,
  6. They have been involved in unethical or disciplinary behavior.
  7. This information is provided for educational purposes only. I do not endorse any of the companies mentioned. I do not receive any affiliated fees or commissions.

In short, these are the common red flags you should be aware of per Z0E Financial. Click the link to read more regarding each red flag.

Cost of Financial Advisors

Common Fee Types & Costs per SmartAsset.com

  • Percentage of Assets Under Management: 0.59% – 1.18% per year
  • Fixed Fees: $7,500 for portfolios under $500K
  • Hourly Fees: $120 – $300 per hour

These costs may appear steep as there are no fixed fees or hourly fees associated with setting up a 401k plan or consultation with the investment manager. However, there are fees based on the size of the employer’s 401k plan which can range from 0.5% to 2%. The average annual fee charged for most funds is 1% per the Center for American Progress.

If you are unable or unwilling to pay these fees to a financial advisor, you can:

  1. Negotiate a lower fixed or hourly fee.
  2. Negotiate the lowest percentage paid for Assets Under Management.
  3. Learn how to purchase and manage your own assets.

Only you know how much you can afford to spend to invest your own assets or how much you want to spend learning how to invest wisely. The best way to know is to do your own due diligence.           

Recap

We consult professionals for many things, such as a lawyer for legal advice.  Having a financial consultant is no different. In fact, it may be the most important consultation regarding your financial and retirement planning. Per Fidelity, Industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated.

Consequently, planning for your retirement or investing in a college fund can be challenging without some knowledge of personal finances or financial advice. Therefore, you should start with budgeting, paying down debt, saving an emergency fund (3 to 6 months of living expenses), and then investing.  

This is the easiest way to start your journey to financial security. However, when seeking a financial adviser make sure they are a good fit for your financial circumstances today and your future. Keep the following points in mind when seeking the right financial adviser because it can make the biggest difference in your financial situation.

  1. They are a fiduciary adviser working for a client’s best interest.
  2. You understand the fee structure for every financial product they are recommending.
  3. The adviser discloses their compensation structure.
  4. They do not exhibit any red flags.
  5. Use tools to aid you in your search for a potential financial advisor.
  6. Use resources provided by the SEC.

Additional Resources:

How To Build Wealth From Nothing By Investing?

Wealth Accumulation

How To Start Over At Fifty With No Money Tips

Can I Retire At 60 With $500K

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