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Sunday, April 21, 2024

What is a fiduciary advisor?

What is a fiduciary advisor?

Key takeaway

A fiduciary is an individual or organization that has a legal duty of care and loyalty to another person (or persons).  

Is your financial advisor a fiduciary?  

You may have heard the word “fiduciary” when searching for a financial advisor. This is an important term to understand, and we’ll break down why it’s so critical to work with a fiduciary. But first, the fiduciary meaning: A fiduciary is an individual or organization that has a legal duty of loyalty and care to another person (or persons).  

A fiduciary who manages money for another person is required to act with the utmost honesty and integrity, making decisions that are in that person’s best interests. If someone is acting in a fiduciary capacity with respect to their client – and it can be proven they haven’t acted in the best interest of their clients – they can be held legally liable.  

What is expected of a fiduciary?  

Fiduciary financial advisors must:  

  • Put your best interests before their own or the firms.  
  • Act in good faith and provide you with all relevant facts about fees and investments.  
  • Disclose any potential conflicts of interest.  
  • Follow processes designed to ensure the advice they provide is in your best interest.  

Understanding fiduciary duties 

A fiduciary’s responsibilities are both ethical and legal. If someone has a fiduciary duty to you, he or she must act first and foremost in your financial interests. A fiduciary cannot recommend an investment that doesn’t benefit you such as one that carries higher fees than a virtually identical available investment.  

Here are common examples of breaches of fiduciary duty:  

  • Acting negligently  
  • Making unauthorized trades  
  • Account churning (making excessive trades to generate commissions)  
  • Misrepresentation (making a false statement about a security transaction)  

How do you know if your financial advisor is the right fit for you? 

Vet candidates carefully. Get to know any financial advisors you are considering and ask questions to ensure they are suitable for your needs. Here are good questions to ask: 

1. Are you a fiduciary?  

Only financial advisors who are fiduciaries are required by law to follow the fiduciary rule both on retirement and other investment accounts.  

2. Has your firm made an adequate investment in technology?  

Many investment firms haven’t made adequate investments in technology, such as basic financial planning tools. You should seek an investment firm who has the software to provide a transparent view of your entire financial life. Otherwise, how would the firm’s advisors be able to provide you with holistic financial and investment advice?  

3. How are you compensated?  

It can be tough to find out how an advisor is compensated. Some financial firms can be incentivized by indirect compensation such as revenue sharing, lending products, and trading commissions. These costs are often buried in fine print, but they can really add up if you’re not careful.  

Fiduciary duty  

Financial advisors are held to different standards depending on their job title, certifications, and more. As we’ve mentioned, those professionals who are held to a fiduciary duty are required to act in the best interests of their clients. In addition to providing accurate and thorough advice, fiduciaries must put their clients’ interests above their own.  

Certain financial professionals are automatically held to a fiduciary standard. Under the Investment Advisers Act of 1940, all RIAs are required to provide the fiduciary standard of care.  

CERTIFIED FINANCIAL PLANNERTM professionals (CFP® professionals) are also automatically held to a fiduciary standard. The CFP Board requires a uniform fiduciary standard of conduct for all certified individuals, pursuant to its Code of Ethics and Standards of Conduct. Any planner who fails to act with a fiduciary standard of care risks losing their CFP credentials.  

Why it’s important to choose a fiduciary financial advisor  

A fiduciary advisor can give you greater peace of mind with your money. You’ll know they’re legally obligated to act in your best interests.  

09.19.2023

RO3085758-0823 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Alex Graesser, ChFC®

Contributor

Alex Graesser is a Senior Financial Professional at Empower. A Chartered Financial Consultant (ChFC®), he is responsible for developing enduring relationships with his clients by providing expert guidance for a lifetime of financial security.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

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Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”). EAG is a registered investment adviser with the Securities and Exchange Commission (“SEC”) and subsidiary of Empower Annuity Insurance Company of America. Registration does not imply a certain level of skill or training.