By Matt Gallagher
Your Finances
Matt Gallagher
An important concept when evaluating financial advisors is the concept of being a fiduciary. In the most basic sense, fiduciary involves a duty or trust between a trustee and a beneficiary and the obligation of the trustee to act solely in the best interests of the beneficiary. A typical fiduciary relationship might be between a lawyer and a client, an employer and an employee, a doctor and a patient or a spouse to another spouse.
When assuming a fiduciary role, one should undertake a duty of care making informed choices and duty of loyalty avoiding any potential conflict of interest. Depending on the specific role of a fiduciary, additional legal responsibilities and obligations may apply.
When choosing a financial advisor, it may be assumed that all advisors would be held to the same standards and always act in your best interests. However, this is not necessarily so. An advisor signing on as a fiduciary offers some significant differences in terms of their legal and ethical standards.
Fiduciary advisors are required to be completely transparent about the products and services they recommend. They must fully disclose and thoroughly discuss their decisions with their clients, providing all relevant information and pertinent facts. This transparency includes disclosing any fees charged, whether they are a fixed percentage of assets under management (typically 1 percent) or a flat fee. This type of transparency provides greater understanding of the services offered and whether they align with your particular situation.
Fiduciary advisors are not tied to a particular company and as such can select financial products from a broader marketplace. This is in direct contrast to brokers, who are employed by broker dealers, limited by their employer’s products and receive commissions for selling these products. Access to a wider variety of investment choices allows for a more customized portfolio.
Fiduciary advisors are held to a higher standard. As discussed, a fiduciary advisor is legally bound to act in the client’s best interest and disclose any conflict of interest according to the Investment Advisors Act of 1940. Conversely, brokers follow a basic suitability standard set by the Financial Industry Regulatory Authority. The suitability standard only requires a reasonable belief that an investment or frequency of transactions fits the needs of the client (age, risk tolerance, goals). As such, a broker may have a conflict of interest based upon commissions or sales goals.
Engaging a financial advisor can be a crucial step in attaining one’s financial goals. When evaluating potential advisors, consumers should consider a wide variety of factors such as services provided, fees and access to investment products, as well as the standard of care required of the advisor. Partnering with a fiduciary advisor who is bound to place your interest above their own is another important factor to consider.
Matt Gallagher is a partner and head of business development at TrinityPoint Wealth. He can be reached at 203-693-8519 or mgallagher@trinitypointwealth.com.