Fiduciary Financial Advisors: All You Need to Know

How to Find Fiduciary Financial Advisors

Investment advisors registered with the SEC or the state securities regulators are fiduciaries. However, broker-dealers and their representatives, who under the Best Interest Regulation are bound by the more strenuous standard promulgated by the SEC, not FINRA’s rule on suitability, are not, as a matter of law, bound by fiduciary duty.

There are several resources you can use to check if an advisor is a fiduciary. NAPFA is a website where you can get a list of Certified Financial Planners near you who would be fee-only and pledge to be a fiduciary. The Certified Financial Planners Board and the Financial Industry Regulatory Authority have tools for finding advisors.

Yet, finding potential advisors is just the beginning. Here are some critical questions to ask when vetting them to ensure they meet your needs and maintain minimal conflicts of interest:

• How are you compensated?
• What certification and licenses do you have?
• What services do you offer, and who are your usual clients?
• How often do you communicate with your clients?
• Can you provide a written confirmation of your fiduciary commitment?

In addition, you should ask the advisor for their Form ADV and Form CRS; the SEC mandates that filing these forms is a must to operate an advisory firm. The forms will also provide the following information, namely, the nature of the advisor’s business, their method of compensation, their educational background, any potential conflict of interest, and any disciplinary action taken against the advisor. This form is available on the SEC website through the Investment Advisor Public Disclosure (IAPD) tool. You may also request a performance record and a list of client references with whom you can follow up.

How can I ascertain if my advisor serves me as a fiduciary?

The simplest method to confirm whether your financial advisor is a fiduciary is to directly ask them. Additionally, you can utilize FINRA’s BrokerCheck database to look up your advisor’s professional background and confirm their registration with the SEC, which indicates a commitment to fiduciary duty. Another reliable approach is to carefully examine the disclosure forms that advisors are legally required to provide you, which outline their fiduciary obligations.

The foundation for trust is built on a good reputation, and the same applies when searching for a financial advisor. They would have years of education, passed examinations, and be associated with organizations that regulate the financial sector. Some of the designations to look for are Certified Financial Planner (CFP) and Chartered Financial Analyst (CFA). Working with and being an affiliate of a prominent organization, such as the National Association of Personal Financial Advisors (NAPFA), would undoubtedly present convincing and robust evidence that the financial advisor puts ethical and fiduciary considerations at the heart of their practice.

What services does a fiduciary financial advisor offer?

Let’s start with what services both fiduciary and non-fiduciary financial advisors offer. Then, we’ll dig into three other common questions:

• What is meant by “fiduciary responsibility”?
• How is a fiduciary different from a financial advisor?
• Where can I look for a professional fiduciary financial advisor?

The role of the financial advisor is to guide the investor on a path of sound decisions for putting their money to good use and investing it profitably. Their cumulative experience allows them to serve either as a fiduciary or a non-fiduciary advisor. They include:

• Investment Advisors
• Certified Financial Planners
• Wealth Managers
• Asset Managers
• Financial Consultants
• Robo Advisors

All types of financial advisors have their pros and cons. The best type of financial advisor for you depends on your situation and what you need. In this regard, we developed a unique guide for high-net-worth and ultra-high-net-worth clients, pointing out ways they can sort through suitable and unsuitable financial advisors.

Not all advisors are officially certified to offer money or investment management advice. They will often have had prior training in the area of expertise in which they offer their services. For example, investment advisors often have previous training in stock trading arenas.

However, most financial advisors cannot manage aspects of money and investment management. Typically, they specialize in one or two areas. The only financial advisors who offer a full range are typically wealth managers.

For example, Pillar Wealth Management’s wealth managers aim to find the best financial solution for individuals holding between $5 million and $500 million in investable assets. Our free consultation, where more details about our exceptional services will be provided, is, for this reason, available for responding to your questions.

How Do Fiduciaries Function?

Now, I will discuss fiduciary financial advisors and the concept of being a fiduciary, which involves putting our client’s best interests first.

A good proportion of fiduciary financial planners are Registered Investment Advisors authorized by the Securities and Exchange Commission to offer either wealth management or financial advisory services. to be licensed, an RIA is required to clear an exceedingly high bar of quality and ethical requirements.

The SEC grants a license to such a firm, on condition that all fiduciary financial advisors operate under the Advisors Act of 1940. This legislation binds the fiduciary advisor by law to always act in the best interest of the client. They are supposed to clear their processes of any conflict of interest that might make them invest their client’s money emotionally.

High Net Worth and Ultra High Net Worth clients deserve protection that can only be offered by a fiduciary. Download our free hardcover book, “The Art of Protecting Ultra-High Net Worth Portfolios and Estates – Strategies for Families Worth $25 Million To $500 Million”, to learn how fiduciary advisors make a difference in the lives of their Ultra-High Net Worth clients to protect their wealth.

Get in touch with us, discover more about us, and keep an eye out for our next ‘Ask us anything’ session. After having seen what fiduciary responsibility is and what the main difference between a fiduciary and a non-fiduciary advisor is, let’s go into why having a fiduciary rather than a non-fiduciary advisor is important.

What’s Fiduciary Got to Do with Financial Advisory?

The definition above makes it clear that a fiduciary adviser is professionally certified by the SEC and is under a complete legal obligation to always have in mind the best interests of the client. Now, what would be the opposite of a fiduciary advisor? Does this kind of thing really exist—the attitude of indifference toward the best interests of his client in a nonfiduciary adviser?

No! We are not saying that non-fiduciary brokers are evil-minded and that they do not bother about their clients’ welfare. Actually, almost all of them are watching out for what’s best for you. However, they’re not always able to follow through with the promise of acting in your best interests because of some external factors. Let’s explore these factors.

Experience

Many non-fiduciary advisors are individuals just starting their careers at a large financial institution or bank. These professionals are, of course, happy to work with you and attend to your interests.

However, their lack of experience means that often, they’re only doing their supervisor’s bidding. They might be unable to make decisions for themselves, and the large caseload at their bank/institution means that they are unable to create the personalized investment or financial plan you deserve. They’ll be forced into putting your money in the same pre-set investment plans they use for everyone else.

High-net-worth and ultra-high-net-worth clients have special needs and requirements that these plans cannot fulfill. The plans do not account for your life goals and usually carry an unnecessary level of risk.

A fiduciary financial advisor for high-net-worth clients usually needs a wealth of experience before they can become an RIA. Regarding financial advisory and wealth management services, industry experience is worth its weight in gold. It allows advisors to understand the nuances of the market and correct the many misconceptions new advisors have. For example, experienced managers will realize that it’s almost impossible to consistently time the market in the long run and that it is hazardous. You can find more information about portfolio return maximizing strategies developed by our fiduciary advisors in this guide.

Conflicts of Interest

This is one of the most notable differences between fiduciary and non-fiduciary advisors. Fiduciary advisors must avoid conflicts of interest and notify you if any occur.

Though non-fiduciary advisors want to make the best decisions for their clients, they have to contend with many other interests. This includes their interests and those of their employers. An example of this is that large banks may often place quotas on financial advisors, such as the number of clients they need to bring in. This leads to a situation where advisors are chasing new clients (to appease the interests of their employer) and not paying enough attention to the current ones.

Whenever there is a potential for a conflict of interest, you can never guarantee that your interests will be first on the priority list.

Compensation Methods

A fiduciary financial advisor for high net-worth clients will almost always only make their money via an annual percentage fee (usually 1%). This fee will be charged on the value of the assets they’re managing. Fiduciary advisors will not make money any other way.

However, there is a chance that non-fiduciary advisors may have fees or costs other than this annual fee. There are a few problems with these alternative compensation methods.

For example, we hear many investors say that their broker or investor does not charge any fees. This is usually misleading because those advisors are usually making their money on spreads, margins, or commissions.

Why is this an issue? The problem is that commissions and other product-based compensations also create potential conflicts of interest. Suppose your advisor’s employer is earning more commission on a particular security or product. In that case, they may be more inclined to have to offer you that security or use your money to invest in it.

It also means your adviser or manager will probably engage in more active money management if they are paid on a product basis, and that is typically not in your best interest because our experts and other researchers have found that, for high-net-worth and ultra-high-net-worth individuals, a passive approach often works a lot better. If you’ve above $10 million in assets, all the details you need about the best money management and investment advisory practices are included in our exclusive guide.

The basic rule, however, is that investors must differentiate between fiduciary and non-fiduciary advisors. That really could save them a lot of money!

How do you find the right fiduciary financial advisor?

From the above, it can be seen that the best results are attained with fiduciary financial advisors. Always look after your best interests.

But how do you go about finding the best fiduciary financial advisor? Is there a way to categorically judge the value advisors and managers provide?

Yes! Detailed below are all the essential characteristics of a successful fiduciary financial advisor for high-net-worth clients.

Has Experience

As we noted earlier, most fiduciary advisors are likely to be seasoned professionals. Experience, though, is not just a function of the number of years in the business; there is a right sort of experience.

The right experience would be a proven record of excellence and success in dealing with high-net-worth and ultra-high-net-worth clients. The financial advisor should know why your needs and situations differ from those of an average investor. An advisor with this kind of experience will know the nuances of your wealth and the best strategies to protect it. They will know the best way to gauge your goals and create a personalized plan to meet those goals.

Pillar Wealth Management’s wealth managers currently have over sixty years of combined experience in servicing clients with $5 million to $500 million in investable assets. Want to learn why our experience matters? Schedule a free consultation today through our website.

Knows Risk Minimization Strategies

Therein lies the rub: many financial advisors and managers believe that diversification is the very definition of lowering risk. What we have observed is that of all the merits of diversifying an investment portfolio, the ability to minimize the risk inherent in the market is just one of them. At the same time, the larger the amount of assets you possess, the more significant the potential loss of your portfolio’s accumulation.

Experts at Pillar Wealth Management have found that consistent, optimized asset allocation strategies are more significant for risk mitigation than diversification. It will optimize the ratios of bonds, cash, and equities in your investment portfolio. This will allow you to navigate economic fluctuations more successfully. You may not be able to prevent losses, but you can at least decrease the impact of potential negative situations.

Possesses Knowledge of Techniques to Reduce Cost and Tax

The persistence of unnecessary costs is an issue we see all too often with clients who visit us with complaints of wealth loss.

Avoidable costs like bond sale spreads, margins, internal expenses, and active vs. passive management costs can slowly but surely reduce your wealth, and you might be completely unaware of the danger you’re in. Not only do these costs reduce your wealth, but they also keep you from getting the best portfolio performance possible. Our unique guide details how costs and taxes can hold back portfolio performance.

The fiduciary financial advisors you speak to should have a solid plan for cutting down your taxes and costs. If they can’t provide a comprehensive solution for this, you’re better off looking elsewhere.

Invests Unemotionally

The best fiduciary advisors have effective processes to remove emotions from the investment equation. Emotions and investment should not go hand in hand, and most advisors know this. However, not everyone has the correct processes and systems in place to remove emotion from their decisions.

For example, Pillar Wealth Management utilizes a 1,000-Scenario Stress Test on your portfolio to measure how robust it is against future circumstances. It pits your portfolio against 1,000 different scenarios to see how it will perform.

We disapprove of a portfolio until we are sure that it can EXCEED your goals in around 75 to 90 percent of scenarios.

Final Verdict

You can be more confident in making a decision if you have the answers to essential questions like ‘What are the main requirements of a fiduciary?’ and ‘What is the differentiating characteristic between a fiduciary advisor and a financial advisor?’

What makes the distinction is the scope of fiduciary responsibility.

Wearing the fiduciary hat means that the financial advisor will play a very central role in the effective management of your finances. In this capacity, the financial advisor determines your well-being with regard to money management, both in the long run and today. This means they owe it to you to put your goals in personal finance at the very heart of their advice and actions. In turn, you should engage in investment strategies and financial planning that will best serve your interests.

Partner with Pillar Wealth Management: We have served as investment advisors for the last sixty years with extended expertise in the financial matters of wealthy and very wealthy individuals. Please drop in without a prior appointment.

Frequently Asked Questions

Who is a fiduciary financial advisor?

A fiduciary financial advisor puts the interests of their clients ahead of their own and is required to take such actions that favor the client, with full disclosure of any conflict of interest, following a standard of transparency and trust.

Is JP Morgan a fiduciary?

JP Morgan offers some fiduciary services, primarily under its asset management division. Not all the services offered by JP Morgan, however, fall under a fiduciary duty; the latter totally depends on the particular agreement and the services being used.

How are fiduciaries compensated?

Fiduciaries may receive compensation in the form of flat fees, hourly rates, or even a percentage of assets under management. Note that they should not receive a commission on product sales, to guard against conflicts of interest.

Does a CFA qualify as a fiduciary

Obtaining a Chartered Financial Analyst (CFA) designation does not, on its own, make an individual a fiduciary. Nevertheless, CFAs are holders of a reputable professional designation. They are expected to practice with high ethical standards, which comply with a number of critical fiduciary principles.

Is a fiduciary financial advisor worth it?

This is actually a point many consider to be the very reason for a relationship with a fiduciary financial advisor. After all, the relationship is based on high trust and the duty to act in the best interest of the client. Fiduciaries can protect their clients from falling prey to high fees and unfitting investments that non-fiduciaries might push.

Does a fiduciary serve you better than a broker?

A fiduciary, after all, is best for strictly adhering to the best interest of the individual. Typically, brokers operate under a suitability standard: advice needs only to be suitable, not the best.

Should we consider the question of the trustworthiness of fiduciaries?

Fiduciaries usually operate under legal guidelines requiring that they carry out their operations at all times in the interest of a client; for this reason, they are likely to be much more trustworthy than other financial advisors.

How can I tell that a financial advice provider is a fiduciary?

Just ask the advisor if they operate as a fiduciary and to show you their credentials and registration documents. Then, ask if they are registered with the SEC or other equivalent national regulatory body, by which, in most instances, a fiduciary duty is inferred.

What is the risk to the fiduciary?

The real risk with regard to fiduciaries would be their negligence or failure to be in line with the high expectations placed on them, which has an impact on the financial outcome. However, the risk would have been mitigated through the legal framework regarding fiduciary duty.

Do I really need a fiduciary?

Deciding whether to hire a fiduciary depends on your financial needs and the level of trust you feel you need. If you need advice about your finances in an unbiased way and want an advisor who is legally required to work for your best financial interest, then you would want a fiduciary.