Making Sure Your Finances are the First Priority: What a Fiduciary Offers You

What Is a Fiduciary?

Fiduciary refers to a person or organization that acts on behalf of others to manage assets responsibly, by placing a client’s best interest over their own. But it’s a whole lot more than that. At its core, the word means trust, to act in good faith, to conduct yourself ethically and with integrity.

In the finance industry, that’s rarer than you think.

You should have the confidence that when a financial professional is trusted with your life savings, they’re responsible for acting in your best interest, all the time. Every time.   Unfortunately, that’s not always the case. There is no legal definition of “Financial Advisor” and that’s a big problem – when anyone can use the term, everyone does.  The problem is the title “Financial Advisor” does not explicitly identify what ethical standards an advisor is operating within when they are advising investors.

Yes, there are more than one.

Types of Financial Advisors

Many investors assume that their Financial Advisor is always acting in their best interest but often, they simply don’t know. In fact, a lot of the big, well known Wall Street brokerage firms tend to further obfuscate this issue by allowing their Advisors to float back and forth between the two standards, or “wear two hats”.

So, here’s what you need to know. There are two standards, or “hats”, Financial Advisors can operate within.  First, we have Registered Investment Advisors (RIAs) like Monument, which are required to “act in the client’s best interest” 100% of the time.  This is referred to as the “Fiduciary Standard.”  Pure RIAs can only wear this one hat.  We are compensated for our advice through an agreed upon and fully disclosed “fee-only” fee structure, cannot charge or accept any commissions, and cannot participate in murky reimbursements from third parties. In fact, at Monument, we no longer maintain the regulatory licenses needed to buy and sell securities for a commission.

This means you can rest assured that RIAs like Monument put your best interests first.  In fact, it’s the law that Advisors operating under the Fiduciary Standard are obligated to a “duty of care” and a “duty of loyalty” that constitute ethical, client-first advisement, enforced by the Securities and Exchange Commission (SEC).  Remember, true fiduciaries only wear this one hat and are paid for providing clients advice and nothing else.

Some advisors are held to a different standard and while they are currently allowed to hold themselves out to the public as “Financial Advisors”, they are not always required to act in a fiduciary capacity.  Remember, when anyone can use the title Financial Advisor, everyone does.  These Financial Advisors, which include registered representatives of large Wall Street “broker dealer” firms and insurance salesmen, are often paid commissions because they can operate under the “Suitability Standard”.  This standard allows the financial advisor to sell investment products to clients so long as they are “suitable” for their financial situation.  In other words, they do not have act in your best interest when recommending an investment product–they just merely need to ensure that the investment is suitable.  This creates a conflict of interest, because an advisor operating under the Suitability Standard can find several different suitable investments for a client and choose the one that pays them highest commission or fee and not have to disclose that.  In other words, they are not obligated to act in your best interest; Acting in a client’s best interest would entail recommending not only a suitable investment but also selecting the cheapest investment that meets a goal. Instead, these Advisors are only obligated to ensure that the investment is suitable.

Be aware of advisors that switch hats back and forth, referred to as “Hybrid Advisors.”  It can be difficult to know which hat they are wearing, so it is incumbent upon the client to ask and know what hat a hybrid advisor is wearing at each stage of an engagement.