What is a Fiduciary Advisor and is the Best Advisor to Work with a Fiduciary Advisor?

Advisors who possess a fiduciary duty to their clients are required to put their clients’ best interests above their own at all times. Many people are surprised to find out that this obligation isn’t required of all advisors. In fact, most advisors aren’t required to act as a fiduciary in all their interactions with a client.

Why are fiduciaries often considered the best advisors for clients?

How can you benefit from working with a fiduciary financial advisor, compared to working with financial advisors that aren’t fiduciaries?

Fiduciary advisors have two main duties while managing money which include a duty of care and a duty of loyalty.  Duty of care means fiduciaries are required to make informed business decisions by reviewing all of the available information about your financial life before making recommendations or plans. 

A major benefit of working with fiduciaries is that they always look out for the client’s best interests and disclose any conflicts that may negatively affect the client (which relates to duty of loyalty). This can have a profound impact on the decisions you and your financial advisor make in collaboration and what they might have you do to preserve or grow your wealth. 

Fiduciary advisors are legally bound to not use a client’s assets for their own benefit. This relationship and standard of care serves to prevent situations where there are conflicts of interest. For example, a financial planner may encourage you to use certain investments because they could have a stake in them. Advisors may favor certain products because they can benefit from them. Fiduciary advisors have a duty to explain why they are making a decision and what you could gain from it.

Are there different types of fiduciary advisors? Are Certified Financial Planner (CFP®) advisors fiduciaries?

The term fiduciary is still not widely known and understood. One of the most important questions you can ask a financial advisor is, “Are you affiliated with a broker/dealer?” If they are, then they are not a true fiduciary because they are in a position to receive benefits, commissions, and kickbacks for selling you a certain product. True fiduciaries typically work for Registered Investment Advisory firms (RIA) in accordance with the Securities and Exchange Commission’s Investment Advisors Act of 1940. Some financial advisors work for a firm that is both an RIA firm and a broker/dealer firm. They may claim to be a fiduciary because they work for an RIA, but this does not mean that they act as a fiduciary 100% of the time.

One way you can be sure your financial advisor will act as a fiduciary is to work with a Certified Financial Planner, often referred to as a CFP®. Upon earning the Certified Financial Planner designation, CFPs acknowledge they will adhere to the CFP Board’s Code of Ethics and Standards of Conduct and act as a fiduciary when providing financial advice to their clients. This standard applies to those who are Certified Financial Planner (CFP®) certificants, and not anyone else who holds out as a financial advisor. And even more significantly, it only applies within the scope of financial planning. The CFP certificant actually has to be providing what’s called “material elements of financial planning” to be deemed a CFP fiduciary.

The CFP fiduciary standards are much broader in scope in terms of what the fiduciary duty actually covers. You have to be doing financial planning, but once you are, it applies to all financial planning activities, including subsequent recommendations. Thus, arguably CFP fiduciary is actually the broadest fiduciary rule in scope, because it applies to your retirement advice, tax advice, insurance advice, investment advice, and everything else under that is categorized as financial planning.

The basic concept around the term fee-only fiduciary, which is another category of fiduciary advisor, is that this type of advisor only can receive compensation directly from the client for services provided.  In other words, fee-only advisors do not receive sales-related compensation from their employer or third parties (like fund companies). In this instance, fees can take the form of a flat rate, an hourly fee, or a percentage of assets under management.  Fee-only advisors can work with clients on a one-time financial planning basis or on an ongoing basis, depending on what suits the circumstances best.

In order to reduce conflicts of interest, many fiduciary financial advisors may choose to not offer certain products directly, and instead, recommend their clients purchase products elsewhere. In other instances, when fiduciary advisors offer their clients certain products or services, they will disclose any conflicts of interest regarding their recommendation, place their clients’ interests ahead of their own, and most importantly, act without regard to their financial interests.

Can you work with a fiduciary financial advisor on a virtual basis? How can I find a fiduciary advisor near me?

A fiduciary financial advisor can uphold his or her fiduciary duties if the advisor is working virtually (online or Zoom), in addition to in-person with you. In most instances, storing, managing, and sharing files will be an extremely important part of the virtual financial planning process and analysis. The advisor should use secure video conferencing and financial technology, including file sharing, to collaborate with clients and protect their financial information. To ensure private content is kept safe, documents shared with a virtual financial advisor can use a combination of security measures including: data encryption, authentication processes, and password-protection.

Working with a virtual advisor can have several advantages including saving you time and increasing convenience. When you meet with your financial planner virtually there may be an increased efficiency as you will often be able to log into your accounts together on the spot and screen share if you have specific questions that arise. This option often gives clients the ability to accomplish more in the same amount of time. Virtual or digital financial planning also can allow clients to find and select the best fiduciary financial advisor for their specific needs and does not limit clients to working with an advisor based solely on shared geography.