When it comes to taking control of your finances, a financial advisor can be a great addition to your team. They offer insights and access to the investment world that most people aren’t privy to – they’re basically a power-up for your financial plans.
At the same time, it can be stressful choosing an advisor. How do you know which one is a better fit for you than another? A great way to tackle this big decision is to acquire more knowledge about the game before you step off the sidelines.
For example, a huge term in the industry, and one you’ve likely heard before, is “fiduciary.” That five-syllable word packs a whole lot of meaning, so let’s break it down – beginning with what a fiduciary is and why you should care.
What (and Who) is a Fiduciary?
A fiduciary is “a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust.” Basically, they’ve always got your back.
In the financial world, a fiduciary is a specific type of advisor who is held to a different standard. They are required to always act in your best interest, even if it’s not necessarily in their best interest. For instance, some products advisors sell can result in a commission being earned by the advisor and/or their firm. A non-fiduciary is only required to make recommendations that are “suitable” for you, which can leave a lot of wiggle room that makes some people uncomfortable.
We don’t mean to suggest that you should only trust fiduciaries (they’re not all trustworthy), or that you should never trust non-fiduciaries. But it’s important that you understand the difference between the two to help guide your decision-making.
No advisor is entirely free of conflicts of interest when it comes to the advice they give you. Sometimes your advisor might recommend products or services, like insurance, that don’t fall under their fiduciary rules – but they are required to let you know when those moments happen.
The rules for fiduciaries are long and complex, but it’s important to know the gist of them before entering a relationship with a financial advisor. The big one to remember? A fiduciary advisor is legally required to make decisions in your best interest and always tell you about any potential conflicts of interest.
Who Holds Fiduciaries Accountable?
The fiduciary rule is enforced by the Securities and Exchange Commission, AKA the SEC. After the major Wall Street crash in 1929, the federal government created the SEC to enforce rules, protect investors and prevent market manipulation. They’re the ones who are supposed to catch people like Bernie Madoff (okay, not their best moment).
All fiduciaries fall under the jurisdiction of the SEC. Non-fiduciary advisors such as broker-dealers, however, are governed by a totally separate agency (but we’ll save that for another time). The more you know!
Why Should You Care?
You need to be able to trust your advisor. After all, you’re handing over access to your assets, sharing your hopes and dreams, and entrusting them to make the most of it. For the vast majority of people, those assets represent an entire lifetime’s worth of hard work and savings.
It’s important to know what questions to ask in those consultation meetings so you get the full picture of what an advisor offers. Likewise, you also need to be aware of your legal rights.
In your search for a financial advisor, it would be wise to add the term “fiduciary” to your list of questions, as well as a few follow-up Qs to identify the full scope of the advisor’s fiduciary duty.
Find a Fiduciary in Lasso
Are you on the lookout for a top-notch advisor? Want to filter through the masses with just a few clicks (and test-drive what they can do, completely anonymously)? We’ve got you covered.
Download the (totally free) Lasso app today to build your financial plans and anonymously browse hundreds of financial advisors.