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What Does It Mean To Follow A Fiduciary Standard?

What Does It Mean To Follow A Fiduciary Standard?

2 Aug 2021
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As more people become aware of the importance of managing their finances to prepare for uncertainties and plan for the future, recognize that some financial advisors follow a fiduciary standard and can assist you in finding your financial independence.

Bottom line: advisors who have a fiduciary focus may have a different way of approaching things.

Here is a harsh fact: not all financial advisors perform with their client’s best interests as the priority. Not everyone is willing to talk about their money issues and future aspirations, especially if they just started looking into building a financial plan. After all, finding someone to help to manage your money and assets is not quite the same as finding someone to do your grocery shopping for you.

Reg Best Interest (Reg BI) was established by the Securities and Exchange Commission (SEC) in 2019. It falls under the Securities and Exchange Act of 1934 and is related to the U.S. Department of Labor’s fiduciary rule.

What is a Fiduciary Focus

First of all, what is a fiduciary? Simply put, a fiduciary must always put their client’s best interest first. There is a high level of importance on loyalty and care and they must avoid a conflict of interest at all costs. The fiduciary focus prohibits recommending any investment that does not have the ultimate purpose of helping the client. Any potential conflict of interest must be disclosed prior to any decisions being made.

First, however, let’s dive deeper into the differences between a fiduciary and a general financial advisor.

The Fiduciary Standard vs. the Suitability Standard

Think of it this way: financial advisor is a job title. And like any other job, there are different standards, licenses, and certifications within.

Generally, there are two sets of standards for most professions: the fiduciary standard and the suitability (non-fiduciary) standard.

  • The fiduciary standard is the highest level of care and mandates the service provider always to put the client as a top priority. Therefore, a fiduciary advisor can only recommend an investment if it is the best fit for the customer’s financial situation.
  • The suitability standard allows an advisor to make any recommendations they believe to be “suitable.”

How Fiduciaries are Compensated

Typically, there are three compensation structures used by financial advisors:

  • Fee-only
  • Fee-Based (A combination of service fees and commission)
  • Commission

A fee-only compensation could be a flat rate per service, an hourly or retainer rate agreed by both parties, or a percentage of the asset managed.

A fee-based compensation includes all the same possibilities of compensation as the fee-based option but also allows the advisor to sell commission products as well.

Commission-based compensation is when an advisor earns money based on the products that are sold to clients.

What are the Fiduciary Duties

As we mentioned earlier, the fiduciary is the highest level of care. Therefore, this regulation requires advisors to fulfill the most strict duties and obligations.

According to the Securities and Exchange Commission, fiduciary duties include:

  • To maintain utmost loyalty and good faith.
  • To provide full and fair disclosure of all material facts
  • To never mislead a client
  • To disclose any conflict of interest and to avoid said conflict
  • To always use a client’s assets for and only for that client’s benefit

What Happens if an Advisor Breaches their Duty

Breach of duty is no light-hearted matter. According to the SEC, a breach could result in revoking the advisor or the firm’s registration. The advisor may also be barred from the industry, alongside a hefty disgorgement. Other penalties, such as a criminal charge, may also follow depending on the situation.

The Investment Process

It’s best to begin with an overview of your current financial situation. Then, bring up your most pressing matters and concerns, your short and long-term goals, and your available funds at the moment. If your advisor is following the fiduciary standard, this information helps them determine what will be in your best interest when it comes time to begin your initial investments.

Tell them everything you think they’ll need to know about you, the more information they have, the better chance they can evaluate your financial situation. For example, if you are a caretaker for someone with medical expenses, your risk tolerance would be quite different from someone who just graduated from college. Also, keep in mind to discuss your monthly contribution with your advisor.

Once your advisor has gathered enough information, they will help you determine your account type and put together an initial investment portfolio for you.

Finding a Legitimate Fiduciary

One great way to find advisors that follow the fiduciary standard is through using the NAPFA search engine. You can also go to the people that you trust in life to help find an advisor you can trust, so ask your friends and family if they know any fiduciary focused financial advisors. If they give you a recommendation, another great option is to directly ask that advisor if they are following the fiduciary standard.

Final Note

It’s important that you feel you can trust your financial advisor. For some, they want to have a financial advisor that follows the fiduciary standard, so it’s the first thing they look to confirm. If this is important to you, don’t risk not knowing, the relationship between you and your financial advisor needs to be built on trust and loyalty, and the fiduciary standard helps to be a starting point for that relationship.

Finally, make sure you understand the services your advisor offers before entering any agreement. Not all advisors do everything. Some may focus on portfolio management, while others may concentrate on annuity and retirement. The most suitable advisor should understand your current situation and have the necessary knowledge to help you pursue your goals.

The Advantage of Humanity Wealth Advisors

Humanity Wealth Advisors was founded by a single governing principle: That the everyday individual is our greatest bottom line. That’s why our team is committed to your success.

Our fee-based services include advice and support tailored to your needs, and we provide guidance in plain, ordinary terms (without all the industry jargon).

With over 20 years of financial experience, we help our clients develop a clear, holistic plan to build their financial futures. When you’re ready to pursue financial planning, contact our team of friendly, reliable professionals.

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More about the author: Harry Sherdil
As a fiduciary financial advisor at an independent firm, Harry strives to offer the same resources, tools, and research as bigger firms while serving new and existing clients' best interests.
VIEW MORE POSTS BY Harry

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