Because so much of the financial services industry is still commission-driven, conflicts of interest are rife. For an individual seeking investment advice and/or financial planning, there is a wide variety of advisors from which to choose. There is a clear distinction, however, between the two main types of advisors: those that have a fiduciary duty to clients and those that do not. Is it vitally important that clients understand the critical differences between the two. Here we discuss the benefits of working with a fee-only fiduciary financial advisor.
What is a Fiduciary?
A fiduciary is a person (or entity) that acts on behalf of another party and which has a legal duty to put the interests of the other party ahead of their own. Thus, financial advisors operating under a fiduciary standard are duty-bound to put the interests of their clients first. While there are nearly 700,000 financial advisors in the U.S. today, only about 10% operate under a fiduciary standard. This means that only 10% of advisors have the obligation to act in the best interests of their clients.
5 Benefits of Working With a Fee-based Fiduciary
1. Conflicts of Interest are Minimized
Fiduciaries are duty-bound to put the interests of their clients ahead of their own interests. This means they cannot make investment recommendations from which they derive any benefit (such as through a commission).
2. No High-Pressure Sales Tactics
Many people are reluctant to seek financial advice because of the industry’s reputation for aggressive sales tactics. Because a fiduciary is loyal to a client (not to a brokerage firm or mutual fund company), he or she has no reason to pressure a client into buying or selling a certain investment. Fee-based advisors work only for their clients.
3. Objective Advice
There is a blizzard of different financial products available today through banks, mutual fund companies, insurance companies, brokerage firms and others. Banks, brokerage firms and insurance companies are not fiduciaries, however, and their sales representatives have no obligation to act in their clients’ best interests. So how do their clients know for certain why they are being pitched a given product? Clients who work with a fee-only fiduciary know how their advisor is being compensated and can therefore be confident they are receiving advice that is not compromised by a commission or kickback arrangement.
4. Win-Win Business Model
Fee-only advisors usually charge a fee based on the amount of assets they manage for each client. Because they do not work on commission, their incentives are pretty clear: keep clients happy by growing their portfolios while delivering sound, objective advice.
5. Confidence and Peace of Mind
Perhaps the most significant difference a fiduciary can make in clients’ lives is by giving them peace of mind that they have an objective professional sitting with them on the same side of the table.
How Can You Determine if an Advisory Firm is a Fiduciary?
Fiduciaries are typically Registered Investment Advisors (RIAs) that are registered with either the state in which they are based, or, for firms managing more than $100 million, with the U.S. Securities and Exchange Commission (SEC). Fiduciary firms will have their Form ADV, which describes the firm’s business, available on the SEC’s website (https://adviserinfo.sec.gov).
Read more about how and why Orion Capital operates under a fiduciary standard.
