A financial advisor can be a key factor in whether or not you achieve your long-term goals. But before choosing an advisor, it's important to know what professional standards they hold themselves to.
In a previous article, I wrote about the pros and cons of working with a financial advisor. To sum up, deciding to work with an advisor is a very personal choice that will depend on many factors, including their credentials, their investing goals and history, fee structure, and alignment with your own financial goals. One aspect I wanted to revisit was the idea of an advisor’s potential role as a fiduciary.
A person acting in a fiduciary capacity must avoid conflicts of interest, operate with full transparency, and generally put the best interests of the clients ahead of their own. But not all advisors, broker dealers, and other financial counselors operate under that same standard. Many are governed by a standard of “suitability” — which means they are only required to ensure that an investment is suitable for the client at the time of the investment.
You may be thinking: “That’s the same thing, right?” It is not.
A fiduciary standard is a higher standard that takes things into account that “suitability” does not. Among those things: the long-term goals of the investor and the potential long-term future viability of an investment. While some investments you are considering may be perfectly suitable for your goals now, that doesn’t necessarily mean they belong in your portfolio. This can lead to conflicts of interest in some cases in which an advisor receives fees for putting you in certain investments, with a lot of legal-ese language in the fine print.
This is not at all to imply that most financial advisors will actively work to enrich themselves at your expense. But it can mean that your financial goals can be secondary at times to an advisor’s goal of his or her own profitability. The suitability standard is not trivial, and it does offer significant protection. But true and full fiduciary protection offers more, including:
• Notification of any and all conflicts of interest
• A “duty to care” on the part of the advisor
• Continuous monitoring of not only a client’s investments, but also their changing financial situation.
• A legal obligation to understand and occasionally revisit your financial goals.
How do you know if your advisor is a fiduciary?
Ask. Really, it’s that simple. Before you decide to work with an advisor, ask if they are held to the fiduciary standard. If they are not, and if that standard is important to you, keep looking. You may ultimately decide that the suitability standard is enough protection, or you may have a very good relationship with an existing advisor who is not a fiduciary. There is nothing wrong with either of those scenarios. Just make sure you know exactly what you’re signed up for, and what your advisor’s full responsibilities are.