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  • Writer's pictureMatthew Kelley

What Is a Fiduciary Financial Advisor? Six Things You Should Know


When you decide to hire a financial advisor, you will probably do some research to determine what questions to ask before you start interviewing candidates. That research will no doubt urge you to ask advisors, “are you a fiduciary?” It’s good to know that you should ask the question, but it’s even better to understand why you ask it.

First things first – what is a fiduciary?

In a nutshell, the term “fiduciary” refers to one who acts in the best financial interests of other individuals or entities and who puts those interests ahead of their own.

It seems straightforward – what else do I need to know?

Now that you know the textbook definition of a fiduciary, here are six things you should know about what that means and why it matters.

  1. There’s no federal law that defines who can and cannot say, “I am a financial advisor.” You do not have to pass a specific exam or take certain classes to claim the title. So, just because someone says,“I am a financial advisor,” that alone says nothing about whether that person is or is not a fiduciary (or is even qualified to give financial advice)

  2. Brokers, who work for Fidelity, Charles Schwab, Edward Jones, Ameriprise Financial, and many others are not required to be fiduciaries. Instead, they owe what is called a “duty of suitability” to their clients, which means they are only required to suggest investment products suitable for an investor but are not required to give advice or recommend investments in the investor’s best interest. Brokers are “registered representatives,” and that is not the same as being a Registered Investment Advisor - the terms are very similar, but they mean very different things. Brokers might call themselves “advisors,” but they act as agents for their brokerage firm and typically earn commissions!

  3. The term “suitable” can be highly subjective. For example, if your net worth is high enough, a broker could claim that a highly speculative investment is “suitable” for you because you could afford to lose a chunk of money if the investment does not perform well. But does that mean it is in your best interest? Brokers will claim that their “suitability” standard is very similar to a fiduciary standard. It isn’t. There are many horror stories about retirees ending up with highly speculative investments because a broker recommended them. Let’s assume you want to include some investments with a high return potential in your portfolio, knowing there was a higher degree of risk involved. What if you found out that a broker recommended Fund X, even though Fund Y had similar characteristics but charged significantly lower fees? The broker may earn a commission for putting you into Fund X, but not for Fund Y. That creates a conflict of interest, but recommending Fund X would not break any rules. An RIA could not recommend Fund X, as it would not be in your best interest to pay those higher fees. Remember, brokers are loyal to their company first; RIAs are dedicated to the best interests of their clients.

  4. Some financial advisors are required to act as fiduciaries, but not all. A critical distinction is that all Registered Investment Advisors (or RIAs, as we are called in the industry) are, by definition, fiduciaries. That means we are legally required to work in your financial best interest, even if that means we earn less money! Under the Investment Advisors Act of 1940, firms or individuals who are compensated for advising others about securities investments must register with the Securities & Exchange Commission (SEC) and adhere to regulations designed to protect investors. Fine print: Only advisors with at least $100 million of client assets under management must register with the SEC; others usually register with the state where their principal place of business is located.

  5. Not all RIAs are equal in terms of how they interpret their role as fiduciary. For example, an RIA who specializes in a particular type of investment – for example, real estate – could recommend a high concentration in that asset class to clients, even though, in our view, that would not be truly acting in their clients’ best interest.

  6. An advice-only model makes a big difference in an RIA’s ability to truly act in your best interest. We believe that RIAs who charge fees based on the amount of money you have in your investment portfolio (Assets Under Management, or AUM from the advisor’s perspective) face a conflict of interest. While those RIAs will act in your best interest in recommending which investments to hold in your various accounts, they have an incentive to keep as much of your money as possible in those accounts.

So, even if paying off your mortgage early or buying a vacation home with some of the wealth you have accumulated is better for you, an RIA that charges fees based on AUM has a conflict. The SEC says the advisor has to disclose the conflict and discuss it with you, but that does not remove the conflict. In contrast, RIAs who charge a set fee regardless of how much money you have invested have no such conflict – when you ask that advisor, “should I sell some of my investments to buy that boat I’ve wanted for years?” the answer will be based on what is truly best for you.

At Gold Medal Waters, our recommendations are based on what best serves the client’s life because the advice we give does not change what we earn. We do not sell insurance for similar reasons because selling insurance generates a commission for the seller, creating a conflict of interest. When you interview people to find a financial advisor, you could ask, “are you a fiduciary?” but keep in mind that brokers and advisors who are not fiduciaries may dodge the question by saying something like, “I always look out for my client’s interests.” A better question would be, “are you an RIA?” because all RIAs are fiduciaries. If the answer is a pure “yes,” then ask, “do you charge a flat fee, or is your fee based on the size of my investment portfolio?” The answer will make a difference in the advisory relationship. To us, being a fiduciary means we need to know why you are saving and investing, your “why,” and “how much would be enough for you to live your life the way you want to live it?” The answers to those questions will almost certainly affect the advice we give. Rest assured, you can be confident that our advice will genuinely be in your best interest. If you have any questions about our fiduciary duty, reach out to us.


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