What is a fiduciary?
If you’re getting financial advice, fiduciary is one of the most important words for you to know… but it may not be as important as the word trust. By the end of this article, we hope you understand why.
At Reason Financial we’re held to the fiduciary standard on multiple levels. That means we look out for your best interests, not ours. More specifically:
A fiduciary has a legal responsibility to put your financial well-being ahead of their own.
Why is this important?
A number of financial products — let’s say a variable annuity — are packaged and marketed just like anything else. The firms who design these products offer financial professionals commissions if they sell the products to their clients.
Often, advisors market this as a good deal for clients: Because the advisor is paid by the firm making the product, clients may not be asked to pay that advisor a fee. This can sound great on the surface: No fee means free financial advice, right? Wrong.
As you might expect, there is no free lunch. The products aren’t always the best deal for clients. They might have lower returns than competing products, higher fees, or they might not match the client’s goals or risk tolerance.
A fiduciary, on the other hand, is legally obligated to recommend the best product for you, regardless of compensation. Some advisors take it a step further and refuse any product commissions, choosing to work on a fee-only basis.
Fiduciaries and fees
While we work primarily on a fee-only basis at Reason Financial, we don’t always. While we always choose the solution we believe is in your best interest, sometimes it works out to be a better deal if we use transaction- or commission-based pricing, versus a fee-only model.
We believe the key, when it comes to compensation, is transparency. Most of the current skepticism around commissions-based pricing started during the financial crisis, when advisors recommended faulty products in order to pocket the commissions.
But if your advisor is interested in what’s best for you, he or she probably wouldn’t recommend those types of products anyway, regardless of the payment structure. Plus, fee-only advisors can offer bad advice, too. Which is why we try to emphasize transparency and trust, not fee structure, when we talk about financial advice.
How can you tell if your advisor is held to a fiduciary standard?
To figure out if your advisor is legally obligated to act in your best interests, the easiest way is often to ask. You may also be able to tell based on their credentials. Here are some common designations and the standards they are held to:
Certified Financial Planners® (CFPs) are bound to a fiduciary standard by the CFP Board of Standards. The board insists CFPs act in their clients’ best interests on a wide variety of advice, beyond just investments. At Your Reason, Sean and Steve are both CFPs. That means we act as fiduciaries regardless of what products we’re talking about with our clients.
For example, while tax and insurance professionals aren’t typically fiduciaries, when we talk about tax planning or insurance products, we’re acting as CFPs, so we’re still bound by this fiduciary standard.
Registered investment advisor (RIA) firms are registered with the Securities and Exchange Commission (SEC) and are legally required to put client needs ahead of their own. For an advisor to register a firm, they must pass a specific test (known as a Series 65) demonstrating their knowledge of financial and investment products, as well as ethics and fiduciary responsibility.
Registered representative of a broker-dealer — or anyone selling you an investment via a broker-dealer affiliation — is not required to be a fiduciary by regulators. Instead, they’re held to a standard known asregulation best interest. Whatever product they recommend to you must be in your best interest at the time of the recommendation, but conflicts of interest are allowed, so long as they are disclosed.
Some firms work as a hybrid between an RIA and a broker-dealer, which is how Reason Financial operates. The broker-dealer affiliation allows us to serve clients more efficiently when there are more transactional requests.
However, we’re still required to act as a fiduciary based on our CPF status, even on brokered transactions. We will always put your needs first. This is about more than regulations for us; it’s a mindset. We believe this job requires a certain amount of innate goodness. (We even made innate goodness one of our values as a company.)
And that’s why we started this article saying that while fiduciary is one of the most important words in financial advice, it’s not as important as the word trust. We build trust through transparency and education. Which is why we wanted to walk you through the different designations and affiliations we hold, and what they mean.
If you have any questions about what’s included in this article, how it applies to our operating model, or what it means for the advice offer, just ask. We’re happy to answer questions and promise transparent answers.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.