Detailed explaination of fiduciary

What is a Fiduciary Financial Advisor?

What exactly does this funny word Fiduciary mean?  For financial advisors, it’s not as easy to determine as it should be.  Due to multiple government agencies and associations, many types of advisors can answer “yes” when asked if they are a fiduciary.  They can say this even though they do not act as a fiduciary at all times! This is such a big deal that I even wrote an article about it.

Thank goodness for The Institute for the Fiduciary Standard.  Given how hard it is to determine what exactly a Fiduciary is by definition, The Institute has come up with a way to illustrate Fiduciary duty with actions. Once you see these, you’ll be able to ask advisors the right questions.  

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The actions:

  1. Act as a fiduciary at all times. Check. View our Fiduciary Oath.
  2. Decline any sales-related compensation.  We don’t even hold the sales licenses required to get a commission.
  3. Avoid conflicts of interest.  Nobody can completely avoid conflicts of interest.  Fee-Only advisors eliminate most.
  4. Mitigate unavoidable conflicts. Even Fee-Only advisors can’t eliminate all conflicts.  Our primary one involves charging a percentage of assets under management.  Because of that, I have a bias to make recommendations that increase the assets under management.  This could be a 401k rollover or recommending against actions that decrease the assets under management.  I mitigate this by making sure my clients know and reminding them every time we discuss something that could affect assets under management.
  5. Maintain professional knowledge and competence.  We believe the CFP is becoming table stakes.  The CFP Board requires 30 hours of Continuing Education (CE) credit every 2 years.  As a member of NAPFA, I have to do 60 every two years.  As an Enrolled Agent, I have to do 72 hours every 3 years just on taxes.  When you go to a doctor, you want to know that they know what they are doing.  You should want the same for your financial advisor.
  6. Explain agreements and disclosures clearly and truthfully, both orally and in writing. All agreements will be in writing and we are happy to walk you through it.  Here’s the cool part: all agreements are cancellable at any time for any reason.  That’s how much confidence we have, but it’s also how a fiduciary should operate. An advisory relationship only works if it is mutually beneficial.  You should leave if you ever feel that you are not receiving enough value for the fee you are paying.
  7. Establish and document a reasonable basis for advice. This gets to the core of comprehensive financial planning.  To make proper recommendations, we need to understand how a recommendation can affect other areas of your personal financial situation.  This includes having a good understanding of what is important to you and what you want to do with your money.
  8. Follow and document a prudent due diligence process for rendering investment advice. Check out our Investment Philosophy.
  9. Decline gifts or entertainment or other benefits unless minimal in value, occasional in frequency, and consistent with the advisory firm’s gift and vendor relation policies. We both accept and give gifts and entertainment that is both reasonable and customary.  We have policies in place that mitigate instances where a gift or entertainment would unduly influence our decision-making.
  10. Charge reasonable fees and incur reasonable investment costs. We believe our fees are reasonable, but only you can determine the value received.
Another great resource is Wall Street Journal columnist Jason Zweig’s Questions to Ask a Financial Advisor.