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Date: January 13, 2020

Do I Really Need A Fiduciary Advisor?

If you’re new to investing or are looking to become more knowledgeable about who handles your investments, you’ve no doubt come across the term “fiduciary.” While this term may be thrown around quite a bit in the financial investment space, there are some misconceptions about what exactly makes someone a fiduciary and what that means to you as an investor. 

 

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First, it’s important to understand the definition of a fiduciary. A fiduciary is someone who manages assets for another person. A fiduciary is required by law to manage that person’s assets in the best interest of that person or entity, and not their own. While this might sound like an unnecessary distinction, the truth is that not all financial advisors are fiduciaries. 

If you are actively searching for a financial advisor in the Greeneville, TN area this article will help you learn more about fiduciaries and why it makes sense to choose a fiduciary advisor to manage your investments:

 

How Comfortable Are You with Investing Your Own Money?

There’s not a simple answer to the question of whether or not you need a fiduciary financial advisor. This depends on many factors, starting with how knowledgeable and/or comfortable you are with investing. Many people prefer to leave their financial and retirement planning and investing to a professional. 

If you’ve made the decision to use a financial advisor it is important to know that a fiduciary financial advisor is held to a higher standard of care when it comes to their clients’ investments. That is why it makes sense to hire an independent advisory firm instead of a bank. A bank typically employs financial advisors that are not fiduciaries, but rather they are commissioned salespeople. 

If you’re asking for advice on a specific investment, a non-fiduciary advisor does not have to give you advice that acts in your best interest. That’s not to say that just because someone isn’t a fiduciary that they will be dishonest and reckless with your investment, but simply that they are under no legal obligation to look out for your investment. Conversely, a fiduciary is required by law to act in their clients’ best interest and offer advice and recommendations based on their professional opinion.

 

Do You Understand How Your Financial Advisor Earns Money?

Fiduciary advisors are required to have transparent fee structures and earn money by charging fees for managing your investments. 

While it may seem counter-intuitive that fiduciary advisors are generally fee-based and non-fiduciary advisors are usually commission-based, it makes sense when you break it down: 

Fiduciary advisors typically charge an hourly fee for certain services or a fee based on the total amount of assets you are having them manage. When your assets grow it is a win-win for both you and your advisor.

Whereas with a non-fiduciary advisor they are typically paid by commissions. Whether or not your portfolio grows, you are paying them the same amount of money. Oftentimes the advisor is incentivized to sell a certain product because they can make a larger commission. 

In some situations, you may find that a financial advisor is dually registered. Meaning they are a fiduciary advisor (IAR or RIA) and a broker. It is important to note the difference between a fee-only advisor and a fee-based advisor. A fee-based advisor generally derives most of his/her income from fees, but may also occasionally charge his/her clients a commission for certain products. A fee-only advisor is just that: they only charge fees, not commissions. 

 

Are You Fully Aware of Your Legal Rights Under a Fiduciary vs. Non-Fiduciary? 

One main advantage of investing with a fiduciary financial advisor is that in the event they are proving to not look out for your investments above their own personal interests, you may have the right to pursue legal action. 

Since a non-fiduciary advisor is under no such obligation, there is no legal recourse should they make their own interests and personal gains a priority, which they have every right to do. This can happen in the form of the advisor receiving kickbacks for investing client money in specific stocks or basically any time they invest your money but didn’t have your interest at the forefront of their priorities. 

 

Do You Want to Understand How Your Money is Invested?

When you partner with a fiduciary financial advisor, you’re getting full transparency about where your money is being invested and are obligated to receive a full explanation of why that investment was chosen. This can be a great start to investing for someone who is new to the investing space and needs a personal guide to understanding how the process works. 

 

Suitability vs. Fiduciary

You may have heard the terms “financial advisor” and the term “broker-dealers” when talking about investments. Among other differences, the obligation to their clients is also a main difference. For example, the broker-dealer is only obligated to fulfill what’s known as a “suitability obligation” which in very vague terms means that they are supposed to make recommendations based on whether they are suitable for their clients. 

This obligation, while having similar wording to that of a fiduciary, is not at all the same strict and legally binding responsibility that a fiduciary advisor is required to adhere to. In essence, all that the suitability obligation means is that the broker-dealer needs to believe that the decisions they’re making on behalf of the client will truly benefit that client. 

This does not, however, prevent them from exploiting kickbacks or having conflicts of interest with specific investments that will ultimately enhance their interests more than anyone else’s. It’s also important to note the SEC (Securities and Exchange Commission) defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others…” and a dealer is defined as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise….”

 

Do You Know Where to Find a Fiduciary?

Now that you have a better understanding of what a fiduciary advisor means,  the next step is to know how to find one. If you already have an advisor, ask them if they are a fiduciary. If they say they are, you can verify this by using various search tools available online. If you are in the process of finding a financial advisor to partner with, you can do a search in advance of entering into an agreement to ensure you have someone you trust in your corner looking out for your best interests.

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Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.

 

Author:

Steve Dick

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