Understanding Fiduciaries
Reliable, conflict-free advice. That’s what you usually want when you hire a skilled professional to help build and manage your financial portfolio. There are so many professionals calling themselves wealth advisors, that it becomes confusing for consumers. It is important to understand the standards behind an advisor’s title. Some advisors adhere to a fiduciary standard, and others to a suitability standard.
- The only advisors legally held to a fiduciary standard are registered investment advisors, or RIAs. Often referred to simply as “independent” advisors, these are practices made up of an individual or a group of advisors. Practices with more than $110 million under management must register with the SEC. Smaller practices must register with their state.
- Certified Financial Planners, or CFPs, are also under obligation to be fiduciaries—not by the SEC, but by the CFP Board of Standards, which issues the CFP designation to those who complete coursework, pass an exam, and complete ongoing educational requirements.
The fiduciary standard requires an advisor to put clients’ interests first, generally meaning to disclose and avoid any conflicts of interest. Under a suitability standard, advisors have to believe that an investment is a perfectly fine choice for a client, but don’t have to disclose conflicts or that there are cheaper, more tax-efficient or otherwise more competitive products available. A fiduciary would be obliged to disclose the conflict of interest, and the cheaper alternative.
So why would any investor want to hire a nonfiduciary advisor? First, there’s the issue of fees. Registered investment advisors and CFPs typically charge a percentage of assets, partly to remove the motivation to push one product over another, and to encourage long-term relationships with clients. Fiduciary advisors, RIA’s and CFP’s, are skilled professionals who consider the clients bigger picture and provide sound advice for your investment goals.