Securing your wealth: the crucial role of a fiduciary advisor in midlife and beyond
If someone asked you if your advisor is a true fiduciary, putting your interest above all else, do you know the real answer? Try asking that question to people you care about, and you might be surprised how many people don’t know.
Despite the marketing messages, not all financial advice providers hold themselves to the highest standards of client care. Some acknowledge full fiduciary status in writing across all of their services, while others claim fiduciary status for some, but don’t call attention to where they don’t and can’t act as fiduciaries.
Higher stakes – why fiduciary guidance is key
As you progress through the peak busyness years of midlife and beyond, your financial situation often becomes more intricate. Planning for retirement, managing accumulated wealth, and safeguarding assets are tasks that require meticulous attention. Making decisions and trade-offs as the stakes get higher can be challenging. The right financial advisor becomes an invaluable asset during these times. However, how can you ensure that your advisor is truly prioritizing what’s optimal for you?
Unfortunately, not all fiduciary financial advisors uphold the same commitment to their clients. Recognizing the distinction between fiduciary financial advisors and others is key. From legal regulations to fee structure to standards they uphold, the differences among your financial advisor options may surprise you. As we explore the realm of fiduciary advice, it’s clear that choosing the right guidance during your second half of life can profoundly impact your financial journey.
What is a fiduciary advisor?
The best businesses and relationships are built upon trust. And when it comes to furthering your wealth, you’ll want more of the same. But how do you know whether or not you can trust a financial advisor?
You can begin by having a firm understanding of what it means to be a fiduciary financial advisor.
Fiduciaries are legally bound to keep their clients’ interests ahead of their own. That means they’re held to the highest standard in the industry when it comes to managing your investments and giving investment advice.
One way to spot a fiduciary financial advisor, is to see whether or not they’re a Registered Investment Advisor (RIA). This classification identifies firms (or individuals) with fiduciary obligations to their client(s). You can verify their RIA registration through the state securities administrator or the Securities and Exchange Commission (SEC).1
View our registration here.
While some financial firms claim to put clients’ interest first, they are held to a lower standard (more on that later in this article). It’s the continuous fiduciary duties RIAs adhere to that will set your mind at ease. Let’s take a deeper look into what these duties are, and how they look in practice.
Why trust a fiduciary financial advisor?
Fiduciary financial advisors are bound to your interest above their own and top-of-the-line standards. But what does this actually look like in practice? Let’s let some of the SEC’s formal interpretations of RIA duties do the talking:2
- Duty to Provide Advice In The Client’s Best Interest: This stipulates that an RIA must have a reasonable understanding of your objectives, and belief in the solutions they’re providing to solve them. This means they must take a deep look at your situation, clarify what you’re after, and make recommendations based on that information.
- Duty to Seek Best Execution: This standard revolves around maximizing value and minimizing costs for the solutions they provide you with. The RIA must consider each option along multiple performance and cost dimensions to determine what solution has the best overall qualitative execution.
- Duty to Provide Advice and Monitoring: RIAs are also responsible for advising at an interval that’s in the best interest of their clients. This will vary depending on the scope of services being provided, but is nonetheless required for all on-going relationships. With RIAs, you’ll receive regularly-scheduled, integrity-based performance reviews.
- Duty of Loyalty: This duty requires that your RIA fully discloses and provides you with sufficient information on any conflicts of interest that arise. Once all relevant information has been made transparent, you’ll then have the ability to make an informed decision on how to move forward.
You might be wondering why this isn’t the norm. After all, wouldn’t every advisor be required to understand your needs, find the best solution, check in with you regularly, and disclose any conflicts of interests? Unfortunately, that’s not always the case. Advisors who are not fiduciaries are not bound by these laws and code of ethics in the same way.
Fiduciary duty vs. best interest
It can be alarming to think that not all professionals who give financial advice are legally bound to a standard of “fiduciary duty.” And until you know what to watch out for, you won’t be able to relax and feel confident in your financial future. Let’s review fiduciary duty vs. what is now known as the “best interest” standard.
Traditional brokerage firms and banks aren’t held to the same standard as the fiduciary standard. Their investment advisors are held to what is confusingly called “best interest.” As of June 30, 2020 the SEC’s Regulation Best Interest (Reg BI) elevated the former suitability rule for brokers; however, it is still far short of a fiduciary standard. 3
Reg BI relies on new disclosures of conflicts of interest, such as use of proprietary products for which they receive commissions or soft-dollar compensation and incentives. The legislation fails to eliminate these inherently conflicted practices. In short, these new rules still do not require brokers to put investors’ interests first. So, while brokers will be able to state with caveats that they are acting in the “best interests” of their clients, only advisors adhering to a “fiduciary” standard are upholding the Duty to Provide Advice In The Client’s Best Interest.
Regulation Best Interest requires that any financial professional who provides guidance for personal investments must share their Client Relationship Summary (Form CRS). This form provides a full rundown of how your relationship works and will reveal important insights into the standard an advisor upholds. You’ll want to dig in and learn how your advisor or broker gets paid. View our Form CRS here.
Fee only vs. fee-based financial advisors
A financial advisory firm can be categorized based on its compensation structure, primarily as either “fee-based” or “fee only.” A “fee only” advisory firm receives compensation solely from its clients for the services provided, without earning any commissions or other financial incentives from product sales, trades executed or referrals. This only further establishes fiduciary trust and transparency.
On the other hand, a “fee-based” firm can earn compensation from client fees as well as commissions or other incentives from financial product providers, such as mutual funds or insurance companies. While this can provide additional revenue streams for the advisor, it might introduce conflicts of interest, as there could be an incentive to recommend products that yield higher commissions.
When you see the word “commission” you need to also hear “sales rep.” Once incentivized compensation enters the picture, objectivity takes a serious hit. Even when positioned as “best interest,” you must remember that some of that interest may be for the advisor. Trust an RIA’s best-fit review over a broker’s recommendation for a proprietary product.
And in case you’re wondering, we’re fee-only.
How can The Advisory Group help you?
Since our inception, we’ve taken pride in being fiduciary pioneers on the behalf of our clients. We understand how much effort our clients have put into building the wealth they have and/or fulfilling their retirement plan or endowment fiduciary duties. And we also understand how difficult it can be to trust, and accept guidance in wealth management.
With our devotion to the fiduciary standard, and fee only compensation, we make entrusting your wealth to us simple. Our financial planner understands what our clients are trying to create for the next chapter of their lives, and recommend solutions centered around maximizing value. We do this not only because we’re legally obligated, but because we take pride in serving this way.
If you’re ready to relax a bit, and realize more freedom from your success with the help of a responsive team, let’s talk. You can get started by setting up your complimentary consultation, or calling us directly at (415) 977-1200.
References:
The information provided herein is for informative and educational purposes only. The use of hyperlinks to third party websites is not an endorsement of the third party. Third party content has not been independently verified. To understand how this content may apply to you, please contact a financial advisor.
