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Investors should know if their advisor is a Fiduciary.  By J Thomas Knight, CFP®, CPA

One of the primary concerns when evaluating any type of Advisor is whether or not they will work for your best interest. In the world of investments, hiring a Fiduciary should resolve most of these concerns (see ABCDs of Financial Professionals for more details).

A Fiduciary is a person or advisor to whom the law requires act solely and honestly on behalf of the principal. Keeping the client’s or principal’s interests above their own is known as a “fiduciary duty.” A few examples of Fiduciaries are Executors, Guardians, and Trustees. A Registered Investment Advisor, unlike Agents or many Brokers, is also a Fiduciary. As with all Fiduciaries, a Registered Investment Advisor has a LEGAL obligation to carry out their fiduciary duty too.

What’s all this fuss over keeping your best interest in mind? Many ask, “I hired the Advisor, doesn’t the Financial Advisor work for me?” The answer is a definite “Maybe!” The crux of the issue is purity of employment. In other words, do they work for you and if they do, for whom else do they work?

Agents (Insurance) and Registered Representatives or Brokers (Investments) are commissioned and incentivized to sell you financial products by a third-party. Registered Investment Advisors are hired directly by you and collect a fee rather than a commission. Of all the “Financial Advisors,” the Registered Investment Advisor is the only one that works for you. Great, then just hire a Registered Investment Advisor and the problem is solved. Easier said than done, the confusion comes when a Registered Investment Advisor is also an Agent and/or a Broker. The purity of a Registered Investment Advisor as a fiduciary is potentially tainted by the commissions and incentives from also being an Agent and/or a Broker. We say only potentially tainted because the Advisor may hold true to their Fiduciary obligation, even when commissions and incentives are involved. Then again, they may be influenced by these persuasive third-party insurance and investment companies.

You could eliminate all these potential compensation and allegiance conflicts by hiring a “Fee-Only” Registered Investment Advisor. There are two terms regarding advisor fees, Fee-Based and Fee-Only. As the term implies, a Fee-Only Financial Advisor, will only charge a fee for their advice and services. A Fee-Based Financial Advisor will charge a fee plus they have the ability to collect commissions on insurance and/or investment products. Why are these definitions significant to you? As mentioned earlier, a “Financial Advisor” can be a Registered Investment Advisor, a licensed Broker, and a licensed insurance Agent, all at the same time. Commissions can create conflicts with the fiduciary duty of a multi-licensed Registered Investment Advisor. Being a Fee-Only Registered Investment Advisor eliminates these potential conflicts and puts the client’s interests ahead of the advisor’s, thus meeting their fiduciary responsibility. However, if any insurance products are called for, then you will need to hire an insurance agent as well. This arrangement causes you to work with two advisors.

The benefit of your Advisor being a Registered Investment Advisor and also an Agent and/or Broker, is having one point of contact regarding your finances. The downside of having one point of contact is it may pose potential conflicts of interest. If your Advisor is multi-licensed, it is up to them to keep your interests paramount even when commissions are involved. This arrangement requires trust and hopefully you have already established a mutually trusting relationship with your Advisor.

How upfront the Registered Investment Advisor is about these potential conflicts impacting their fiduciary responsibility will provide you with great insight into their integrity, honesty and ethics.

Fiduciary was also cited in our article, ABCD’s of Investment Professionals. We recommend reading this to expand your understanding of the common investment professionals available today.
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