A fiduciary financial advisor is an individual or organization that has a legal obligation to put the interests of their clients ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary requires that a financial advisor maintain a legal and ethical obligation to act in good faith at all times.

KEY POINTS TO REMEMBER AFTER READING THIS ARTICLE

KEY TAKEAWAYS

• A fiduciary is legally bound to put their client’s best interests ahead of their own.
• Fiduciary duties appear in a range of business relationships, including a trustee and a beneficiary, corporate board members and shareholders, and executors and legatees.
• An investment fiduciary is anyone with legal responsibility for managing somebody else’s money, such as a member of the investment committee of a charity.
• Registered investment advisors have a fiduciary duty to clients while brokers and commissioned advisors have to meet a significantly less stringent “suitability standard” when recommending products and strategies. This can cost clients a lot of money.

Understanding a Fiduciary

A fiduciary’s responsibilities require two separate parts: an ethical and legal responsibility to always act in the absolute best interests of their client(s). If an advisor accepts you as a client, they also are accepting their fiduciary duty to them. This is referred to as a “prudent person standard of care”. Strict care must be taken to ensure that there are no conflicts of interest (like a kickback or a bias that lacks evidence) between the fiduciary and the client.

In most cases, no profit is made from the relationship unless explicit consent is granted once both parties agree to work together. It’s made perfectly clear how much would be charged and what services would be provided in exchange. If the client signs the agreement and becomes a client of the fiduciary financial advisor, then the fiduciary can keep whatever benefit they have received; these benefits can be either monetary or defined more broadly as an “opportunity.”

Investment Fiduciary

While many might assume that any financial professional has to be an investment fiduciary (money manager, banker, and so on), an “investment fiduciary” is in fact anyone who has the legal responsibility for managing somebody else’s money. That means that if you volunteered to be on the investment committee board of a local non-profit or municipality, you have a fiduciary responsibility to that organization. You’re now in a position of trust because other people’s well-being depends on you and there are consequences if you betray that trust.

In addition, hiring an investment fiduciary doesn’t relieve the money manager, financial advisor, or banker of their duties. These people still have a fiduciary obligation to select the best investment fiduciary for the job. Sometimes, individuals can be both money managers, investment fiduciaries, and financial planners like we are at Progress Wealth Management.

The Suitability Rule

Some brokers are compensated by commission. They’re held to less stringent standards as a result. The standard that they’re held to is referred to as the “suitability standard” which means that these advisors and brokers don’t have an obligation to ensure their recommendations are absolutely perfect. They have to ensure that every recommendation, it checks the boxes the regulator requires. The boxes typically include things like:

• What does the client want to buy from you?
• What are the client’s unique circumstances?
• What are the client’s financial needs?
• What are the financial needs of the client?

The Problems with the Suitability Standard

At face value, the boxes that advisors who follow the suitability standard have to check sound sufficient but you’ll notice that it doesn’t ask questions like:

• “What is the absolute best solution to help the client?”
• “What is the lowest cost method to accomplish this goal?”
• “Am I qualified to be this client’s advisor?”
• “Is the recommendation I gave the client in their best interest to take?”
• “Did any major conflicts of interest impact my recommendations?”

Why are these questions important to ask?

As advisors, we have a major impact on the futures that our clients enjoy. Recommending certain products, insurance policies, or funds that are awful albeit “suitable” is perfectly legal if you’re an advisor who abides by the suitability standard.

A great example is a fund like AGOVX, Invesco’s Income Fund. There are no fiduciaries out there who would recommend this. Why? First of all, this fund charges a 4.25% front load (which is basically a commission to the advisor in exchange for recommending it… aka a kickback). Once you buy it, the fund charges .98% of the funds you add every year. In addition, it’s performed terribly over the last 2 decades, which are some of the best 2 decades the markets have ever experienced, ever.

The point I’m trying to get at is, that if you work with a fiduciary, you’re less likely to get dogs like AGOVX recommended to you because we’re not paid by the fund company (we’re paid by you to give you the best advice possible at all times).

The suitability standard can end up causing conflicts of interest between a commissioned broker and the client. The most obvious conflict has to do with how the broker is compensated. Under a fiduciary standard, an investment advisor would be strictly prohibited from buying a mutual fund or other investment for a client because it would garner the broker a higher fee or commission than an option that would cost the client less—or yield more for the client.

Under the suitability requirement, as long as the investment is suitable for the client, it can be purchased. This can also incentivize brokers to sell their own products ahead of competing for products that may cost less and are expected to perform better.

Suitability vs. Fiduciary Standard

If your financial advisor is a Registered Investment Advisor, they must be a fiduciary. On the other hand, a broker, who works for a broker-dealer, is likely not. Some brokerage firms don’t want or allow their brokers to be fiduciaries because their whole business is run on commissions and selling products.

Investment advisors, who are usually fee-based or fee-only, are bound to a fiduciary standard. The laws surrounding what a fiduciary is defined as are pretty specific in defining what a fiduciary means, and it stipulates a duty of loyalty and care, which means that the advisor must put their client’s interests above their own.

For example, the advisor cannot buy securities for their account prior to buying them for a client and is prohibited from making trades that may result in higher commissions for the advisor or their investment firm.

It also means that the advisor must do their best to make sure investment advice is made using accurate and complete information—basically, that the analysis is thorough and as accurate as possible. Avoiding conflicts of interest is important when acting as a fiduciary, and it means that an advisor must disclose any potential conflicts to place the client’s interests ahead of the advisor’s.

Additionally, the advisor needs to place trades under a “best execution” standard, meaning that they must strive to trade securities with the best combination of low cost and efficient execution.

What Is a Fiduciary?

A fiduciary must place the interest of their clients first, under a legal and ethically binding agreement. Importantly, fiduciaries are required to prevent a conflict of interest between the fiduciary and the principal. Among the most common forms of fiduciaries are financial advisors, bankers, money managers, and insurance agents. At the same time, fiduciaries are present across many other business relationships, such as corporate board members and shareholders.

What Is an Example of a Fiduciary?

Consider the examples of a trustee and beneficiary, the most common form of a fiduciary relationship. The trustee is an organization or individual that is responsible for managing the assets of a third party, often found within estates, pensions, and charities. A trustee is bound under a fiduciary duty to put the interests of the trust first, ahead of their own.

So, what next?

If you’re needing a financial advisor, ask the following questions when you’re interviewing them:

1. Are you a fiduciary?
2. How are you compensated?
3. What are my total fees, including expense ratios, management fees, loads, etc.?
4. What conflicts of interest do you have?
5. What kind of client is your specialty? What aptitudes, skills, knowledge, and experience do you have that make you more qualified to serve that kind of client?
6. How often will we meet up? How often can I schedule appointments with you?
7. What makes you different from any other advisor?
8. Will there ever be a maximum fee? If I’m worth 5 million or more someday, how much will you charge me? How will you justify that your fee is worth it?
9. What fees are there to start working with you or exit? Am I bound by any contracts?

At Progress Wealth Management:

1. We are fiduciaries.
2. We are only compensated by the fees we charge you directly, which are located here. Since we use individual stocks and ETFs to manage our client’s money, the expense ratios are normally under .1%. Our investment management program could cost an additional .125% per year depending on the options that are most appropriate for you and your goals.
3. We have no conflicts of interest other than we want our clients to keep working with us and will do everything we can to ensure that it’s a profitable relationship for both of us.
4. We are specialized professionals in helping HENRYs. Our founder has over 10 years of experience in financial planning, and his CFP and has been a leader in technical roles at some of the most well-respected firms in finance. You’ll also get access to an EA at no additional cost to you to answer any more complicated tax questions in addition to a JD and various other CFPs.
5. We’ll meet up as often as you need, however, most clients only want to meet up biannually because life gets busy. We require a minimum of once per year.
6. What makes us different is that by hiring Progress Wealth, you’re hiring a team of specialized experts that are veterans of the industry. We have 2 JDs, an EA, and various CFPs all working to better our clients’ lives. In addition, the max fee we charge is 1% of the account. We do a lot of unique things to support our client’s growth that are unique as well.
7. The fee we charged is 1% of the account and it decreases as your net worth grows. We’re talking about putting in place a maximum fee but at this point, there is none. What we do in exchange is ensure that every aspect of your financial life is managed optimally.
8. There are no fees to enter or exit and you’re not bound by any contract at all. If you exited investment management, we’d only charge you for the days that you were in the program.

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