Fiduciary may not be a friendly-sounding word, but it’s critically important to any relationship you have with a financial professional. Here’s why:
A fiduciary has a legal responsibility to put your financial well being ahead of his own.
So it’s important for you to understand whether the financial professionals you work with have a fiduciary obligation to you.
Why is this important?
A number of financial products, let’s say an annuity, are packaged and marketed just like anything else. The firms who design these products offer financial professionals commissions if they sell the products to their clients.
Often, advisors market this system as a good deal for clients: Because the advisor makes money off of products, clients usually don’t have to pay a fee for their services. This can sound great on the surface. No fee means free financial advice!
As you might expect, however, there’s a catch. The products may not be the best deal for clients. They might have lower returns than competing products, higher fees that eat away at returns, or they might not match the client’s goals or risk tolerance.
A fiduciary, on the other hand, is legally obligated to recommend the best product for you, even if another product offers a commission.
For clients, advisor fees can seem daunting at first, but they often ensure that you’re getting the best advice. This can pay off in the long-term, since you’ll be using the products and tools best suited to your goals.
To find out if your advisor is a fiduciary, the simplest option is to ask. But you may also be able to tell based on the type of advisor you work with.
Registered investment advisor (RIA) firms are registered with the Securities and Exchange Commission (SEC) and held to a fiduciary standard. According to the SEC, this means: “the adviser must, at all times, serve the best interest of its client and not subordinate its client’s interest to its own.”
While the term RIA technically refers to the firm, you may see it used casually (or misused, as the case may be) to refer to individual advisors. In order to register a firm as an RIA, an advisor must pass a specific exam — known as a Series 65 — from the Financial Industry Regulatory Authority (FINRA) covering a wide range of investments as well as questions related to fiduciary duty and ethics. All three of Wealthbridge’s advisors have passed this exam.
Broker-dealers — or anyone selling you an investment via a brokerage — are not fiduciaries. Instead, they’re held to a standard known as regulation best interest. Whatever product they recommend to you must be in your best interest at the time of the recommendation, but conflicts of interest are allowed, so long as they are disclosed. So say product A and B both address your needs; A is slightly better for your circumstances, but B offers the broker-dealer a commission. That broker-dealer can sell you B without mentioning A exists, so long as the broker-dealer discloses conflicts of interest and “has a reasonable basis to believe” that product B is in your best interest.
Wealthbridge can make client investments via a broker-dealer or as an RIA. That’s because Wealthbridge offers securities via Cambridge Investment Research (a broker-dealer) as well as Cambridge Investment Research Advisors (an RIA).
Founder Tim Randle explains, “I would rather work in the fiduciary world. But sometimes clients don’t need that. They just need somebody to coach them through a transaction, and we don’t want to turn those folks away.”
Certified Financial PlannersTM (CFP®s) are bound by a fiduciary standard by the CFP® Board of Standards, though this is different than a legal requirement. The board insists advisors CFP® professionals act in your best interest on a wide variety of financial advice, beyond just investments. However, the specifics can vary, and the rules are only enforced by the licensing board, and not by a government agency.
At Wealthbridge, Tim Randle also holds a CFP designation.
Lastly, tax professionals and insurance brokers are not held to a fiduciary standard. Many choose to act as fiduciaries even when they aren’t not required to, but you can always ask for clarification on these points.
“We see financial professionals all the time selling products that are clearly not in the buyer’s best interest,” said Randle. It goes back to the old saying: When all you have is a hammer, everything looks like a nail.
“Sometimes, the product will work for the problem, but it’s not the best solution. Which is why I always start with a problem, not a product,” he said. At Wealthbridge, we’ll recommend the best approach for your problem, which may not be the most obvious product, or what another financial professional was trying to sell you.