Deciding you need someone to help manage your investments is a significant decision. You’re seeking aid to grow your assets and, likely, help you plan for retirement.
Unfortunately, identifying the best person to assist you can be difficult as you wade through the possibilities. In your research, you may identify financial advisors who label themselves as fiduciaries.
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Verifying your advisor has this designation may be the best thing you can do for your money.
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Simply put, a fiduciary is a person who is legally required to act in your best interest with your money. Given the compensation structure of most in the financial advisory field, this simple but powerful distinction is important.
A fiduciary is ethically bound to work for what’s in your best interest, not their commission. As you seek out an advisor, the best way to determine if the person is a fiduciary is to ask them.
Additionally, use the free FINRA Broker Check to learn the employment history, complaints, licensing information, and more. If there is a red flag, it may be best to look elsewhere.
According to Robert R. Johnson, PhD, CFA, CAIA, and professor of finance at the Heider College of Business at Creighton University, your advisor being a fiduciary is a must.
“If a potential financial advisor is not a fiduciary, look elsewhere. In fact, if a financial advisor isn’t a fiduciary, run away!” said Johnson.
He listed chartered financial analysts (CFAs) and chartered financial planners (CFPs) as being held to this fiduciary standard, and ones to consider when looking for investment management.
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On the other hand, financial advisors aren’t held to the same legal standard.
They’re not bad, per se, but there’s no ethical or legal standard to lead their clients to suitable investments that fit within their appetite for risk. Being a financial advisor can often be a mere job description or indicate they’ve passed a test or two.
“The suitability standard of care is lower than a fiduciary duty and requires only that the broker has a reasonable basis to recommend a course of action is suitable for the customer based upon a reasonable inquiry into the customer’s investment profile,” said Johnson.
Unfortunately, this can create a conflict of interest with their recommendations and can often lead to financial advisors suggesting moves that will reap them commissions.
One inherent problem with a financial advisor is they charge commissions. If the advisor is unscrupulous, this may lead them only to recommend actions that make them money, even when it’s not what’s best for you.
Fiduciaries are held to a different standard of care. They typically charge a flat fee or percentage of assets under management. This leads a fiduciary to act in conjunction with your goals and recommend investments that fit within your overall plan and risk profile.
Clarity is essential when managing your investments, particularly when you hire someone to assist you.
Fiduciaries must be clear with what they’re recommending and ensure that it’s suitable to help you reach your holistic goals. Financial advisors aren’t legally required to abide by those same standards.
“Those not subject to the fiduciary standard create confusion among investors, not least by calling themselves ‘advisors,’ even while not being registered as advisors,” said Johnson.
Confusion isn’t a good thing when caring for your portfolio, especially when it allows dishonest actors to earn commission, thanks to that opaqueness.
Hiring an advisor to help with your investments can be a good thing. Don’t stop short when researching potential people to hire. Verifying the professionals are fiduciaries is vital to help assure that the advisor you hire is held to ethical standards meant to help you rather than fatten their pocketbook.
It can be challenging to determine if an advisor is a fiduciary. Use tools like the FINRA Broker Check or ask the person if they are a fiduciary. If they’re unclear or there’s little information on them, it may pay to seek help elsewhere.
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This article originally appeared on GOBankingRates.com: Your Financial Advisor Should Be a Sworn Fiduciary — Here’s Why
