A fiduciary is defined as a trusted individual or organization that acts on your behalf. Often, a fiduciary is a banker, financial advisor, accountant, executor, trustee, or a board member. Typically, fiduciaries have a “bond of interest” with you that ensures the fiduciary will honor the expectations placed on them according to the law; in all cases, the fiduciary must avoid conflicts of interest and only make decisions that benefit you. Ultimately, a fiduciary is anyone whom you delegate your personal, legal or financial choices.
Why use a Fiduciary?
If you are in a position of financial or legal vulnerability, designating a fiduciary can provide peace of mind. In this relationship, you are expressing confidence, good faith, and trust in another person or organization to provide advice and protection. This person or entity will act at all times for the sole benefit and interest of your needs.
A fiduciary is held to the highest standard of care in equity or law. A fiduciary is expected to be extremely loyal to you, the “principal”, such that there must be no conflict of duty between fiduciary and principal. The fiduciary must not profit from their position as a fiduciary, unless you consent.
Types of Fiduciaries
A few examples of fiduciaries include attorneys, real estate agents, and financial advisors. Attorneys are fiduciaries because they must act in their client’s best interest; as well as real estate agents, who must act in a way that benefits a buyer or seller, not themselves. Likewise, a fiduciary financial advisor should make investment decisions with your best interest in mind. Please note, a non-fiduciary financial advisor may recommend products for which they receive a commission or other form of compensation.
Fiduciary Financial Advisor
A fiduciary financial advisor should have your best financial interests at heart; however, not all advisors are fiduciaries. To ensure your advisor is a fiduciary, HereToday recommends using a certified financial planner, or CFP. These individuals are highly trained specialists with significant financial education and experience. The CFP code of ethics states that all CFPs “must act as a fiduciary, and therefore, act in the best interest of the client.”
To verify if a potential advisor is a fiduciary financial advisor, simply ask them to validate their status. You can also use BrokerCheck to confirm if they’re registered with the SEC; additionally, you can use the CFP Board certified financial planner lookup tool. Both designations require fiduciary duty.
Fiduciary Financial Advisor Fees
Depending upon the individual or firm, financial advisors have different ways of charging for their services. While many advisors charge a flat fee, ranging from $2,000 to $7,500 per year, some charge a percentage rate based upon your assets. The rate can be as little as 0.25% to as high as 1% per year.
Investment Advisers and Broker-Dealers
The Investment Advisers Act of 1940 states that an investment advisor, or anyone in the business of providing investment advice, has a fiduciary duty to their clients. However, the act doesn’t provide specific regulations beyond requiring that advisors act in the best interest of a client.
Broker-dealers are persons or firms that buy and sell securities on behalf of a client as well as for themselves. They aren’t uniformly governed by a fiduciary duty; but rather, broker-dealers follow a suitability standard set by the Financial Industry Regulatory Authority, or FINRA. Per FINRA Rule 2111. Typically, broker-dealers must have a reasonable belief that an investment, transaction or the frequency of transactions is suitable for the customer/principal.
An important distinction: the term “reasonable belief” leaves room for broker-dealers to recommend products that could benefit them through commissions, but may not necessarily be the best investment for you. On the other hand, a fiduciary must always act in your best interest.
Disclaimer. HereToday is not a legal service. This content should not be taken as legal advice. Before drafting any legal document, please consult an attorney.