When it comes to choosing a financial advisor, you’ll want to use, and to really understand, this one word: fiduciary. A fiduciary has a legal duty to act in your best interest. Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for your financial situation. It’s a key financial term, however, most Americans cannot define it, and that puts them at risk. A study in 2017 by 401(k) provider Betterment for Business, found that of the more than 1,000 employees surveyed who were contributing to an employer-sponsored 401(k) plan, only 42 percent of them knew the definition of a fiduciary. On top of that, 20 percent of those who took the survey thought that “fiduciary” and “financial advisor” were one in the same, and 27 percent didn’t know what a fiduciary was at all.
“Fiduciary” and “financial advisor” are far from the same. Professor Harold Pollack and financial journalist Helaine Olen explain in their book, “The Index Card,” “a financial advisor working to the fiduciary standard has a legal duty to act in your best interest and is not getting paid to steer you into buying overpriced investment products you don’t want or need. “A majority of men and women offering financial advice don’t work to the fiduciary standard.”
If you’re paying for financial advice, you want someone who will put your interests first, not their own. So it’s important to be specific when asking about whether or not a prospective advisor is a fiduciary, since advisors can be dually registered as a broker (only subject to the suitability standard) and a fiduciary.
Someone is almost certainly working to the fiduciary standard if they are a certified financial planner (CFP), registered investment advisor (RIA) or fee-only advisor, explain Olen and Pollack. To be sure you’re getting the best advice, “You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times?” they write. “This last part, ‘at all times,’ is important. As the fine print on brokerage forms indicates, the fact that an advisor commits to a fiduciary standard for some of her dealings with you does not hold her to this standard in others.”
Fiduciaries have a duty to preserve good faith and trust. As mentioned here, you hear of fiduciary duty pertaining to financial managers and advisors, but you may also hear it in reference to an attorney and their clients. In any case, the professional who the client has retained owes a fiduciary duty to that client and is legally bound to act in the client’s best interest for the duration of their agreement or relationship. Other lesser-known titles also carry a fiduciary duty, like a healthcare surrogate, a power of attorney, or trustee for a trust. These nominated agents have the same duty to act in your best interest as a hired professional. If any party fails to fulfill their legal obligations, it is considered a breach of fiduciary duty and can result in a civil lawsuit. If you have any questions or concerns about the duty owed to you by a fiduciary, consult with a Board Certified Estate Planning attorney, so that he can advise you of your rights.