Fiduciary noun. From the Latin fiducia, meaning “trust”, a person (or company) who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty. (Free Dictionary)
A Registered Investment Advisor (RIA) works as a fiduciary when they give advice and manage money. A Certified Financial Planner® (CFP) is held to a fiduciary standard as part of their commitment to the CFP® Board which created the CFP® designation.
We often try to approach our blog topics with a light touch and a sense of fun. We believe a little humor helps us communicate important financial issues more effectively. With this in mind, we think many people often feel that having to deal with financial matters is like having to visit the dentist – it may be necessary but not exactly something to look forward to. No disrespect meant to our dentist friends. They understand.
This article however, is about something we should all take very seriously: The fiduciary obligation we believe is at the heart of every interaction a financial advisor has with their client. Put simply, a fiduciary duty is the duty to put the client’s interests ahead of the advisors in everything they do. It’s a legal standard to follow, but in our view, also a moral obligation an advisor should willingly accept.
Not all financial advisors are fiduciaries. As a matter of fact, the majority aren’t. Make sure to ask your advisor if they are obligated to follow the fiduciary standard.
While managing money as a Registered Investment Advisor or CFP® requires more effort, the extra effort is worth it to assure clients their financial issues are being looked after with the care they deserve. Let us put it this way: If we were looking to hire a financial advisor for someone we loved, we would hire a Registered Investment Advisor or CFP®!
As we described above, by law, a fiduciary is required to act solely in the best interest of the client. They must fully disclose any conflict of interest, or potential conflict to the client prior to and throughout a business engagement. What does acting as a fiduciary mean to clients in the day-to-day operation of a financial practice? Here’s a good example regarding Registered Investment Advisors: They must disclose completely any conflicts of interests that may affect decision-making on your behalf. So if they were compensated for referring you to their favorite dentist they would need to let you know in writing.
This disclosure, along with information about their services, is an important part of an RIA firm’s Brochure (Form ADV Part 2). You can find lots of good disclosure information by visiting www.adviserinfo.sec.gov to view the brochure and disclosure documents of any advisor.
This brochure/disclosure is a good example of what being a fiduciary is all about. It contains all the information you need to understand how an advisor conducts business, their investment philosophy, experience, business and educational background, the firm’s Code of Ethics, and more. While it is a rather lengthy document that might induce drowsiness and help you get to sleep if you read it in bed, you’ll understand the extent to which fiduciaries are providing full disclosure about their practice.
We want you to know, before all else, what’s important for any advisor is that they conduct their business with honesty, in good faith and with a standard of care that places your best interests at the forefront of all they do.
So, a man walked into the dentist’s office ……….. wait, we said this was a serious article. Sorry, we couldn’t resist.