Volatility and inflation are major concerns for anyone who has their money in the market. One thing that keeps popping up when we talk to clients is, “are you a fiduciary?” If you don’t know what a fiduciary is or why you should use one, we’re going to explain everything in the guide below.
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What are You If You’re Not a Fiduciary?
If someone is not a fiduciary, they likely work under what is called “suitability.” What this means is that the investment advisor or broker will recommend investments that they deem suitable to you.
However, what’s “suitable” for you may not actually be in your best interest.
For example, if you work with an insurance agent, they may sell you life insurance, annuities or other products. These agents will often receive a commission for the transaction. Since the agent is making a backend commission, the question arises:
- Is the agent selling me the best product for me?
- Is the agent trying to maximize their profits?
Of course, the product may be perfect for you, but under the “suitable” category, it only needs to be good enough. In other words, it may not be the best. A good example of this is some insurance agents can only sell insurance products from one company.
Under this example, there may be better products available from other entities, but they will not be offered to you. When a broker or agent is affiliated with a company and must sell only their products, it becomes a question of “Is this really the best product for me?”
A fiduciary works much differently.
What is a Fiduciary?
A fiduciary is something you’ll see a lot of headlines and buzz about online. Most people agree that you should be working with a fiduciary. The problem is that some advisors will say, “I treat all my clients as if I were a fiduciary.”
And while this isn’t a bad thing, there’s a difference between being a fiduciary and treating someone as if you were a fiduciary.
When someone is a fiduciary, they’re bound by a legal duty to recommend the best financial advice, products, investments and so on to you. A few examples of this are:
- Certified Financial Planner, or a person who must vow to be a fiduciary to a client
- Licensing, such as a registered investment advisor, who is bound by law to act as a fiduciary
A fiduciary who provides advice to you must:
- Meet a professional standard of care
- Never put their own interests above your interests
- Avoid misleading statements of conflict of interests
- Follow policies and procedures to ensure the advice given is in your best interest
- Not charge more than a reasonable amount for services
Imagine a person needs something that will provide lifetime income through an insurance product. As fiduciaries, we must go out, research and find the best product for them. We will often recommend 2 – 5 solutions, all of which have pros and cons to look through.
A broker, on the other hand, can sell you a mutual fund, and they may receive a commission on it. For many clients of ours, they want the peace of mind of knowing that we make the best decision for their goals rather than looking at the highest commission.
Working with a fiduciary like us, we will charge an upfront fee but will not receive a brokerage commission. Essentially, we work for you without the risk of looking at the commission and maximizing our own profits.
Let’s look at an example where a client wants us to provide them with the best ETF options on the market. We would then:
- Search for the best product using software that offers an abundance of information and metrics for us to work through
- Since we’re not tied to any affiliation, we can look at performance, volume and value
- Review expenses and fees for each product
Since we’re not working with any individual company, we do not get a hidden cut of commissions.
We are full disclosure fiduciaries, and we’re not saying someone who works in suitability is bad. We believe that working with someone who is required to put your best interests first makes sense to us.
You can learn who is a fiduciary by asking them:
- Are you bound by a fiduciary standard?
It’s crucial to use this phrase because a lot of people will use wordplay. The response may be “I treat my clients as a fiduciary would,” but this holds no weight. Treating someone in a fiduciary way is different than being bound by a high level of standards.
You just never know if a big commission can sway this individual’s recommendation.
We always approach every question by going through the person’s retirement plan. If we don’t know any information about your goals, it’s impossible to recommend the best product. Each decision has an effect, and it’s our job as fiduciaries to look through your goals and plans rather than say, “XYZ product is the best life insurance.”
Now that you know what a fiduciary is and why so many people planning for retirement recommend them, you can make a sound decision when securing your retirement.
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