Among the range of financial advisors, there are the figures that are the fiduciaries, who could be suitable for people who want to start in the world of investment.
When someone wants to start in the world of investment, and does not have much knowledge of the subject, it is best to do it with the help of a professional. Among these figures, there are the popular financial advisors, but there are also fiduciaries. Who are they? Here we explain.
What is a fiduciary?
A fiduciary is a person or organization that acts on behalf of another person or organization. Being a fiduciary means putting your clients’ interests before your own, as the National Association of Personal Financial Advisors (NAPFA) points out.
Even the experts have not reached a definite conclusion as to what a fiduciary is, as it has been a topic of discussion within the financial advisory universe for several years. The only thing they agree on is that a fiduciary must put his client’s interest before his own. In this sense, he must anticipate situations that could affect his clients’ interests.
Lawyers, trustees and financial advisors are among the professionals who may be called upon to act in a fiduciary capacity. NAPFA is a leading organization of single-payer financial advisors that requires its members to adhere to a fiduciary standard.
What is the difference between a fiduciary and a financial advisor?
A fiduciary can be a financial advisor, but not all financial advisors are fiduciaries. Investment advisors registered with the U.S. Securities and Exchange Commission (SEC), as well as in many states, owe a fiduciary duty to their clients. They are obligated to put their clients’ interests first and disclose any conflicts of interest that may influence the advice they provide.
Many advisors working through broker-dealers may not be subject to a fiduciary standard, but rather to the less stringent Regulation Best Interest standard, or Reg BI, as set forth by the SEC. The SEC says this regulation imposes a standard of care on broker-dealers. These regulations have some components of the fiduciary standard, including a duty to disclose potential conflicts of interest that could influence the advice they provide to clients.
Many financial advisors are managed by a suitability standard rather than a fiduciary duty. The suitability standard refers to whether a financial product is suitable or may be suitable for someone in a general situation, such as a person of a certain age or marital status, with a similar amount of income as others, no matter who you are. In a way, this is how robo-advisors’ algorithms work.
A suitable investment or financial product may not be appropriate for your particular situation. While with the suitability standard the advisor might assign it to you, a fiduciary advisor would recommend other options more suited to your personal needs. The fiduciary would take into account such things as your goals, risk tolerance and other investments. He or she should even discuss any conflicts of interest he or she may have if he or she works for an investment firm and suggests their product to you.
Finding a financial advisor who is a fiduciary is as simple as asking him directly if he is one. Because of the values they handle, not only can they not lie, they must sign in writing that they are a fiduciary.