What Is a Fiduciary Advisor? | Investing


-->

Advisor’s Corner

What it means to be a fiduciary advisor has a long and convoluted history. In fact, the original “fiduciary rule” was introduced by the U.S. Department of Labor around the same time consumers first became enamored with the Pet Rock back in 1975.

The DOL’s intentions behind the fiduciary rule were to protect retirement investors from conflicts of interest and to require individuals who oversee retirement plans, like plan sponsors and financial advisors, to act in retirement investors’ best interest. And while the fiduciary rule has endured legislative debates and attempted revisions over the past five decades (most notably in 2010, 2016 and 2020), these guiding principles have stood the test of time like the sarsen stones at Stonehenge.

The origin of the word “fiduciary” also has a rich history. In early Roman history, when someone needed a rock-solid pledge on transferred property, a “fiducia” was created to bind the contract. Fiducia is Latin for “trust,” so the very nature of a fiduciary conveys a sense of good faith, reliance and confidence. Read on for information about how a fiduciary advisor attempts to embody these virtues in a relationship with clients:

The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to act in their clients’ best interest. This fiduciary duty is regulated by the SEC and is characterized by two key applications (summarized):

  • Duty of care. The investment advisor must, among other things, understand clients’ financial objectives and circumstances, and apply skill, diligence and prudence in support of their needs and objectives.
  • Loyalty. The investment advisor must avoid any conflicts of interest and always prioritize clients’ best interests.

How can someone verify whether a financial professional is indeed a fiduciary advisor? One way is to simply ask the financial professional. Another method is to check the SEC website or look into the financial professional’s credentials; a certified financial planner (CFP) professional, for example, is obligated to act as a fiduciary advisor.

There are currently 97,575 CFP professionals registered with the CFP Board. The CFP Board advocates for consumers’ financial interests and offers tips on how to select a financial advisor.

CFP Board CEO Kevin R. Keller, CAE, says, “People want a financial planner professional they can trust, and that begins with the professional acting as a fiduciary. Under the CFP Board’s Code of Ethics and Standards of Conduct, a CFP professional makes a commitment to CFP Board, as part of their certification, to act as a fiduciary and, therefore, to act in the best interests of the client at all times when providing financial advice.”

He adds, “Consumers should choose a financial advisor who commits to acting as a fiduciary. Whether it’s a CFP professional or any other financial expert, you should always insist on a written agreement that mandates a fiduciary obligation to you.”

American consumers place a great deal of trust in the financial professionals who support their ongoing investment and financial planning needs. In fact, according to Northwestern Mutual’s Planning & Progress Study 2023, Americans say “financial advisors are the most trusted source of financial advice, outpacing spouses, family members, business news, friends and social media.”

Among the 37% of American consumers who currently work with a financial advisor, the Northwestern Mutual survey found, there are “significantly higher levels of confidence across a range of areas, including being prepared for unplanned expenses (31 percentage points higher), being able to retire when the time comes (29 percentage points higher) and achieving long-term financial security (28 percentage points higher).”

Still, there are different types of credentialed financial professionals who work closely with consumers, such as a CFP professional, an accredited investment fiduciary (AIF), a certified public accountant (CPA), an accredited wealth management advisor (AWMA) or a financial risk manager (FRM).

And while many financial professionals are commonly referred to as “wealth advisors” or “financial planners,” not all of them technically function in a fiduciary capacity.

Beyond the context of a title or credential, a registered investment advisor (RIA) is an investment firm or person who has formally registered within their state or with the Securities and Exchange Commission (SEC) to manage investments on behalf of their clients and deliver services as a fiduciary advisor.

When clients engage a financial advisor, they have certain expectations about the nature of that relationship. Ryan Murphy, Samantha Lamas and Ray Sin explore clients’ expectations in a Journal of Financial Planning article titled “Identifying What Investors Value in a Financial Adviser: Uncovering Opportunities and Pitfalls.” From their research, they list the top qualities clients value the most in their relationship with a financial advisor:

  1. Helps me reach my financial goals.
  2. Has the relevant skills and knowledge.
  3. Communicates and explains financial concepts well.
  4. Can help me maximize my returns.
  5. Has a good reputation and positive reviews.

What’s striking is that clients value a collaborative, dynamic relationship with their financial advisor and expect conversations with a purpose, not just a checkup about their investment portfolio. Olivia Hails, director of Janus Henderson, sees this dynamic firsthand, as she supports hundreds of registered investment advisors in Alabama, Tennessee and the Florida Panhandle.

“The benefits I have seen in my tenure of working with a fiduciary advisor are encapsulated in the hands-on planning experience a client receives,” she says. “Money management is simply one lane among many that these advisors and teams provide (to clients).”

She adds, “The real value comes from the proactive communication from advisors helping households answer questions they did not know they needed to ask when it comes to their long-term money and life goals.” Janus created a program called the Art of WOW to help financial advisors deliver meaningful experiences for their clients.

Many financial planners of varying stripes may have good intentions and want to deliver a “wow” experience, and fiduciary advisors are not unique in that regard. There is a distinction, however, in that fiduciary advisors embrace a formal, legal process to always pursue clients’ best interests, and to invest time and energy in the financial objectives that matter most to their clients. After all, there’s an implied promise at stake when consumers reach out to financial advisors for help.

U.S. News makes no representations or warranties in connection with the information provided herein, nor to the accuracy or applicability thereof. U.S. News does not give, offer, or render tax, credit, or legal advice. Before making financial or investment decisions, U.S. News recommends that you contact an investment advisor, or tax or legal professional.



Source link