Make Sure You Hear This F-Word Before Hiring a Financial Advisor

In an August study conducted by the Nationwide Retirement Institute (NRI), researchers found that more Americans are turning to family and friends instead of financial advisors for help with their finances.

The NRI report summary showed that among more than 1,000 adult parents, only 27% choose to work with a financial professional, compared to nearly 60% who rely on friends and family.

One factor contributing to the low percentage of US adults working with financial professionals has been a fear of being scammed by an unscrupulous advisor. While the risk of encountering fraudsters in any industry can never be fully eliminated, you can significantly increase your odds of finding a trustworthy financial professional by hiring a fiduciary advisor or planner. 

But is your financial advisor a “fiduciary”? And what exactly does “fiduciary” mean?

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What Is a Fiduciary Financial Advisor?

In short, fiduciary financial advisors must, by law, recommend the best investment solutions for their clients. However, it is not enough that a product is “suitable.” A higher standard applies to a fiduciary advisor.

It would be best if you didn't assume a financial advisor is a fiduciary.

Before you hire an advisor, you should ask if they will always act in your best interest as a fiduciary. Fortunately, you can easily find fiduciary financial advisors today if you know what to look for and how to ask the right questions.

Certified Financial Planners (CFP) are Fiduciaries

One way you can be sure your financial advisor will act as a fiduciary includes hiring a Certified Financial Planner, often referred to as a CFP. Upon earning the Certified Financial Planner designation, each CFP acknowledges they will adhere to the CFP Board's Code of Ethics and Standards of Conduct and act as a fiduciary when providing financial advice to their clients.

The CFP professional places each client's well-being above that of the firm where they currently work. Moreover, the fiduciary duty requires the proper disclosure of material conflicts. Therefore, the advisor must act with care, skill, prudence, and diligence to best serve the client's objectives. Finally, the advisor must comply with all laws and regulations.

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“Fiduciary” Is Still an Unclear Term

What is problematic today is that the term “fiduciary” is still not widely known and understood. Many investors don't understand generic terms such as “financial advisor” and “senior planner” when seeking an advisor. Be careful. Believe it or not, so-called certification programs can be completed in a few days that some advisors use to suggest expertise.

It is all the more challenging to research and finds a fiduciary advisor because the onus is on the individual. Unfortunately, most people are not financial experts. They also do not have the time to sift through dozens of advisory firms to find the right fiduciary for their situation.

Choose an Advisor Who Works in Your Best Interests

Why is it so crucial that your financial advisor be a fiduciary? If your advisor is not working in your best interests, they might attempt to sell you a product that is not the best for your situation.

For example, a sub-optimal investment solution might line the advisor's pocket with commissions and high-fund fees more than it helps you achieve your long-term goals. Or a non-fiduciary advisor could recommend complex products and portfolios that are uneasy to understand in hopes clients won't call their strategy into question.

How Do Fiduciary Financial Advisors Mitigate Conflicts of Interest?

To reduce conflicts of interest, many fiduciary financial advisors may choose not to offer certain products directly and, instead, recommend their clients purchase products elsewhere. In other instances, when fiduciary advisors provide their clients with certain products or services, they will disclose any conflicts of interest regarding their recommendation.

In addition, they should place their client's interests ahead of their own and, most importantly, act without regard to their financial interests.

How To Find a Fiduciary Financial Advisor

You'll find many fiduciary financial advisors featured on Wealthtender ready to help you develop a personalized plan to achieve your long-term goals.

For example, you can search the Wealthtender Guide to Certified Financial Planner professionals to find CFP fiduciary financial advisors. Chartered Financial Analysts also agreed to a fiduciary duty when working with clients, and you'll find several featured on Wealthtender.

Beyond Wealthtender, you can also check out the CFP Board's website. Enter your location and the planning services you seek. The “Find a CFP Professional” search tool quickly displays CFP professionals in your area. In addition, a Certified Financial Planner professional adheres to a strict code of conduct, which includes agreeing to a fiduciary duty.

In addition to the CFP Board's website, investors seeking a fiduciary financial planner can use the NAPFA (National Association of Personal Financial Advisors) “Find an Advisor” search function.

Financial professionals who are NAPFA members are fee-only fiduciaries complying with a strict code that is comprehensive, client-centered, and demonstrates competence. And you can visit the XYPN website to search among hundreds of fiduciary advisors.

One more due diligence tip: review an advisor's Form ADV via the SEC Investment Adviser Public Disclosure IAPD website. A Registered Investment Advisor (RIA) must register with the SEC. That relationship requires upholding a fiduciary duty to clients.

An added step, though, is to dig into the RIA's Form ADV. The ADV form discloses business practices, conflicts of interest, and the background of the advisory firm and its employees who give advice.

How Much Should It Cost to Work With a Fiduciary?

The good news is that the cost of hiring a fiduciary advisor may not be any more expensive than hiring a non-fiduciary. Often, fiduciaries work on a fee-only basis, which usually means an annual planning charge of a few thousand dollars per year.

Many advisors' fee structure relies on “assets under management,” whereby you pay a percentage of your portfolio to the advisor each year. In general, you should spend no more than 1% per year.

The Bottom Line

A fiduciary advisor must act solely in the client's best interests. They agree to put the client's financial circumstances above their own. With so many opaque investment products available these days, working with a fiduciary is more critical than ever.

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This article was produced by Wealthtender and syndicated by Wealth of Geeks.

Mike is a freelance writer for financial advisors and investment firms. He's a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Mike is a frequent contributor to the Humble Dollar personal finance site.