A financial advisor is a finance professional who provides services to clients to help them accumulate wealth and grow assets. Similarly, fiduciary financial advisors are financial experts committed to putting their clients’ needs and best interests before their own. Understanding the difference between a fiduciary vs. a financial advisor can help you determine the type of financial advisor you may want to work with.
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What Is a Fiduciary Advisor?
Legally, the term fiduciary refers to an organization or individual that acts on behalf of a client or person and puts their best interest first. Common examples of fiduciaries include attorneys, bankers and offices of public organizations and companies. All these figures work to better their clients, shareholders or customers. If a fiduciary does not work in a client’s best interest, they can be held liable.
Similarly, fiduciary financial advisors work in investing and strive to help their clients achieve financial gains. A financial fiduciary operates in the best interest of whoever they represent, making various decisions they deem would benefit the client. For example, a financial advisor may manage your stock portfolio and choose when to buy or sell stocks if they think it will be an advantage to you.
The term fiduciary is important to look for, especially when searching for a financial advisor. It indicates that this advisor minimizes conflicts of interest and strives to be as beneficial as possible to a client. While a fiduciary financial advisor has many responsibilities, some of the most important tasks include:
- Striving to bring the most benefit to the client.
- Putting the client’s interests before their own when seeking terms and prices.
- Minimizing conflicts of interest.
- Disclosing any possible conflicts of interest.
- Avoiding using clients’ assets or information to benefit themselves.
- Acting in good faith and providing transparent services to clients.
- Ensuring all advice and information provided to clients is constructive and correct.
Are All Financial Advisors Fiduciaries?
Research from Financial Engines found only 50% of investors working with a financial advisor were certain their advisors act as fiduciaries. In contrast, 38% did not know if their advisor was a fiduciary. Not all financial advisors are considered fiduciaries, as there is a difference between these terms. The term financial advisor is a general job description, including both nonfiduciary and fiduciary advisors. As the name implies, fiduciary financial advisors are held to the fiduciary standard, which means they are obligated to act in your best interest.
The term fiduciary holds one’s duty to the highest level of care possible. A fiduciary must act for the client’s advantage, even if it may hinder their personal benefit. For example, a fiduciary advisor cannot use a client’s assets to determine a stock may be valuable and then buy the stock for themselves before securing it for their client.
In some cases, this even means a fiduciary financial advisor must choose the best course of action for their client even when it may result in reduced or no compensation for the advisor. As a fiduciary, an advisor cannot consciously recommend an investment that carries higher fees or less return on investment than a virtually identical one.
If you work with a nonfiduciary financial advisor, bear in mind that they are not held to the same level of care and are not legally bound to act in a client’s best interest. While a nonfiduciary financial advisor still wants to provide a high level of care to maintain client relationships, ethical standards and their job, they are not legally bound and obligated to follow fiduciary standards. For example, they may be selling products, and their job is to ethically match the best product for a client’s specific need, but they are not overall managing a client’s wealth on a fiduciary basis. This is just one example.
Why Working With a Fiduciary Financial Advisor Is Important
While nonfiduciary financial advisors may provide similar services, they may also be incentivized to take certain actions to benefit themselves or the company when a comparable sale was available at a lower cost or a larger financial gain for the client. Working with a fiduciary financial advisor can greatly reduce this concern and ensure your assets are used professionally and advantageously. Some of the main benefits of working with a fiduciary financial advisor include:
- Peace of mind: When working with a fiduciary financial advisor, you can enjoy peace of mind knowing your assets are being cared for and looked after appropriately. Because fiduciaries are held to such a high standard, you can rest knowing your advisor has every reason to treat your assets with the utmost respect.
- Reduced conflicts of interest: Another beneficial aspect of working with a fiduciary financial advisor is minimized overall conflicts of interest. Working with a fiduciary advisor can reduce conflicts of interest and ensure your assets are being used to benefit you.
- Financial growth opportunity: Because a fiduciary financial advisor strives to work in your best interest, you have the opportunity to help maximize your financial growth and create an impressive portfolio that is managed in an ongoing manner. Fiduciary advisors are financial experts dedicated to helping you achieve your monetary goals, and they aim to meet and exceed any expectations you’ll have when working with them.
- Transparent practices: Because a fiduciary financial advisor adheres to high standards, they must be transparent in their actions. Transparency helps increase your peace of mind and understand where your money or assets are being used and how this will benefit you.
How to Find a Fiduciary Financial Advisor
The same Financial Engines survey found 93% of Americans believe financial advisors should be fiduciaries. All financial advisors registered under a state securities regulator or the U.S. Securities and Exchange Commission (SEC) must serve as fiduciaries. Stockbrokers, broker-dealers and insurance agents, on the other hand, are required to fulfill a suitability obligation, meaning they need to provide acceptable recommendations, but do not have a legal responsibility to put the client’s best interest before their own.
Fortunately, numerous resources can help you find a fiduciary, including the National Association of Personal Financial Advisors (NAPFA). NAPFA makes it easy for you to find and work with certified fiduciary financial advisors. Each fiduciary advisor within NAPFA uses a fee-only basis.
While this tool is undoubtedly useful and important, you will also want to make a list of any relevant questions you want to ask a potential fiduciary financial advisor. In many cases, you may want to inquire about licenses and qualifications, services offered and their communication frequency and style with clients.
You may also want to consider requesting a copy of a financial advisor’s form CRS and form ADV, which are required paperwork for advisory firms to complete. These forms can provide you with useful information about the advisory firm, including educational background, pay structure, disciplinary history, conflicts of interest and more.
Plan a Secure Future With Nova Wealth Management
At Nova Wealth Management, we pride ourselves on focusing on results, and we believe long-term financial stability and security require thorough planning. Our team of financial experts helps you take control of your future with financial planning services that fit your needs. We offer various financial services, including retirement investment planning, legacy estate planning, health care throughout retirement planning and more.
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