Imagine a world where every professional had to act in your best interest. Wouldn’t that be nice?
That’s what it means to be a fiduciary financial advisor.
In the world of wealth management, a fiduciary advisor is someone who is a registered and certified investment advisor and is mandated to act in their clients’ best interest at all times. Being a fiduciary isn’t something you can turn on and off whenever you want. Advisors are required to file Form ADV to register with both state and federal authorities in order to become fiduciaries. This form describes the advisor’s business in detail—including information about ownership, clients, employees, business practices, affiliations, and any potential disciplinary actions taken against the firm. Fiduciaries also must disclose all fees and conflicts of interest in a brochure that would be given to potential clients.
Despite the fact that Americans overwhelmingly expect financial advisors to act in their best interests, not all of them do. Not everyone involved in investments is a registered investment advisor. Brokers, for example, don’t necessarily care about whether a trade you make is the right move for your overall investment strategy or financial goals since they are not required by law to always act in your best interest. They may just want their commission.
Although fiduciary duties aren’t explicitly defined, they are reinforced by case law. Very simply, fiduciaries are required to put their clients’ interests before their own.
What Are the Legal Responsibilities of a Fiduciary?
Fiduciaries have a number of legal responsibilities. For starters, they have to provide their clients with a full and fair disclosure about all the facts of the relationship. They also are required to eliminate all conflicts of interest. In the event that they can’t eliminate a conflict of interest, they need to disclose it to their clients.
What’s more, fiduciaries are bound to a duty of loyalty. They need to communicate information that supports the decisions they make in order to meet the standards they’re held to. As mentioned above, they also have to file Form ADV with the SEC to provide transparency to their operations (find out whether an advisor has filed Form ADV here). Through these disclosures, clients will be able to see whether a firm is fee-only or fee-based, whether advisors receive commissions, and what kind of residual revenue they might earn, if any.
How Do Their Responsibilities Compare to Those of Other Advisors?
Regular advisors, on the other hand, are required to provide suitability information—meaning that a recommendation is suitable to some investors or specific customers. As long as their recommendations meet the suitability standards, non-fiduciary financial advisors can act in their own interests. For this reason, it comes as no surprise that research suggests U.S. investors lose roughly $17 billion each year taking conflicted advice.
To illustrate, imagine a client wants to invest their money in bonds because they’re safe, and their advisor obliges. There’s just one catch: The non-fiduciary bought a junk bond that has an incredibly long duration, they got a big commission by doing so, and they didn’t tell their client.
A fiduciary, on the other hand, is not allowed to engage in this deceptive behavior. They would have to select a bond that matches the client’s risk appetite and investment needs.
How to Choose the Right Advisor for You
As you begin looking for an advisor who works best for your specific situation, you first need to understand how they get paid. Do they have any conflicts of interest? Are they recommending certain moves because they are operating in your best interest, or are they doing it because they’re incentivized to do so? Do they generate revenue from outside business activities? If so, how might that influence their advice?
You’ll also want to consider the advisor’s knowledge level. Are they an expert? Do they have a wide breadth of knowledge on multiple topics (e.g., insurance, investments, Social Security, and annuities)?
Finally, you’ll want to find out whether the firm is subject to SEC violations or lawsuits.
Since the decision of which financial manager to work with is an incredibly important one, none of this information should be withheld.
EP Wealth: Fiduciary Advisors You Can Trust
At EP Wealth, our fiduciary financial advisors believe that trust is a necessity for any client-advisor relationship to be successful. We work hard every single day to make sure we are meeting our fiduciary duties, operating under the expectations of our regulatory and legal mandates, and delivering on what we’ve promised to clients.
Since opening our doors in 2004, we’ve stuck to our principles. As of July 31, 2018, we had more than $4 billion in assets under management—and we’ve never received a single blemish on our record, something we pride ourselves on. This, of course, doesn’t imply that we are perfect. But it does imply that we have a culture of compliance that we work hard to maintain. The same can’t be said for run-of-the-mill advisors—or even other fiduciaries.
To learn more about how EP Wealth’s fiduciary financial advisors can help you achieve a secure financial future, schedule a consultation today