Times When Choosing A Fiduciary Advisor Is Critical To You And Times When It’s Not

You’ve worked hard your entire career. With your nose to the grindstone, you’ve let your retirement assets grow on autopilot. Suddenly, you find yourself sitting on a pile of money. What do you do next?

What is a fiduciary advisor?

While the Department of Labor has a complete booklet outlining fiduciary responsibilities, the essential elements can be broken down into bite-sized chunks. These elements apply to both retirement plans and personal investments.

“Fiduciary advisors have two main duties while managing money, which include a duty of care and a duty of loyalty,” says David Rosenstrock, Founder and Director at Wharton Wealth Planning, LLC in New York City. “Duty of care means fiduciaries are required to make informed business decisions by reviewing all of the available information about your financial life before making recommendations or plans.”

If you want to focus on one phrase that best defines fiduciary, it would be “best interests.” Setting aside the SEC’s “Best Interest Rule,” which some fiduciary proponents question, the term in its original context is fairly straightforward in meaning.

“Financial advisors who act as a fiduciary are obligated to promote the best interests of their client,” says Katie Sheehen, Managing Director, Wealth and Fiduciary Strategist at SVBVB
Private in Boston. “Therefore, advice given and investments selected are always tailored to the client’s needs. When picking a financial advisor, there are a lot of things to consider, size, location, and specialty, but whether or not these advisors are a fiduciary should also be top on that list.”

Do you really need a fiduciary advisor?

There are many different types of financial professionals to choose from. Not all of them offer fiduciary services, and some of them offer both. It’s important you ask any potential service providers if they will be engaging with you in a fiduciary capacity. Why is this important?

“A major benefit of working with fiduciaries is that they always look out for the client’s best interests and disclose any conflicts that may negatively affect the client (which relates to duty of loyalty),” says Rosenstrock. “This can have a profound impact on the decisions you and your financial advisor make in collaboration and what your advisor might have you do to preserve or grow your wealth.”

With roots dating back to the Magna Carta, which prevented the practice of trustees depleting the resources of the orphans they oversaw, you know when dealing with a fiduciary, your assets cannot be legally harvested for someone other than yourself.

“Fiduciary advisors are legally bound to not use a client’s assets for their own benefit,” says Rosenstrock. “This relationship and standard of care serve to prevent situations where there are conflicts of interest. For example, a financial planner may encourage you to use certain investments because he or she could have a stake in them. Advisors may favor certain products because they can benefit from them. Fiduciary advisors have a duty to explain why they are making a decision and what you could gain or lose from it.”

When would you not need a fiduciary advisor?

Still, there are times when the advantage offered by working with a fiduciary is not right for you.

“The most common reason to work with a fiduciary is so that you theoretically receive the greatest level of unconflicted, unbiased advice possible,” says Ryan D. Brown, partner and attorney at CR Myers & Associates in Southfield, Michigan. “Fiduciaries are legally obligated to give advice that is in your best interest, not theirs. Working with a fiduciary to manage your entire financial portfolio may make sense if you believe it will need to be actively managed and looked after on a regular basis, and thus justifiable to pay that fiduciary his or her regular ongoing fee. It would not, however, make sense to pay a regular fee for mundane tasks that you might very well be capable of performing yourself.”

If you have the time, the interest, and you feel confident in your long-term health, you can certainly manage your own investments, even if you know very little about portfolio management.

“Investing can be taught,” says Ryan Derousseau, Financial Planner at Thinking Cap Financial in Huntington, New York. “While many investment advisers like to complicate issues, most investors need to place their money in a few index funds and then just continually invest in those funds. But there are a few situations where a fiduciary/investment advisor would be beneficial.”

When would someone want to use a fiduciary?

If you are a do-it-yourselfer, it’s OK not to work with a fiduciary for your own assets. Note the qualifier here. Suppose you are responsible for someone else’s assets, either as a personal portfolio trustee or as a corporate retirement plan sponsor. In that case, you cannot ignore your fiduciary responsibilities. If you aren’t a professional fiduciary, it likely makes sense to hire one.

“It is most critical for a fiduciary to be brought in to handle investments when there is a significant amount of assets involved and/or complex financial decisions that require expertise and impartial advice,” says Danny Ray, Founder of PinnacleQuote Life Insurance Specialists in Jacksonville, Florida. “This includes retirement planning, estate planning, and managing large investment portfolios.”

Even if you’re only in charge of your own assets, you may find yourself in a position where it might benefit you to hire a professional fiduciary.

“A fiduciary is most important when you do not have the financial knowledge, experience, or ability to make smart investment decisions,” says Andrew Lokenauth, Founder of Fluent in Finance in Tampa. “This could be due to age, lack of experience, or other factors that make you vulnerable to financial harm. By hiring a fiduciary, you can be sure your investments are being managed wisely with the goal of making more money.”

What is a typical fiduciary fee?

You probably are wondering about this. Will you be paying a premium for what appears to be a premium service?

Fortunately, serving as a fiduciary has become the standard business model for investment advisors. Yes, it is required for SEC-Registered Investment Advisers, but not all financial professionals must register with the SEC. Often, it’s not one’s registration that reveals a fiduciary; it is in the nature of how they receive compensation.

“The basic concept around the term fee-only fiduciary, which is another category of fiduciary advisor, is that this type of advisor only can receive compensation directly from the client for services provided,” says Rosenstrock. “In other words, fee-only advisors do not receive sales-related compensation from their employer or third parties (like fund companies). In this instance, fees can take the form of a flat rate, an hourly fee (or project-based fee), a subscription fee, or a percentage of assets under management. Fee-only advisors can work with clients on a one-time financial planning basis or on an ongoing basis, depending on what suits the circumstances best.”

If you’re looking for a true fiduciary advisor, perhaps you should first ask about fees. Imagine the service provider earns commissions or other income based on product sales. Should this be the case, you may find that product does not produce investment results compared to unconflicted alternatives, thus, costing you more in the long run.

“There are many well-regarded regional and national brand name storefronts that do not follow fiduciary standards, and this may be in direct conflict with what is in the best interest of prospective clients,” says Rosenstrock. “Most financial advisors have to sell investments that are suitable for clients, but fiduciaries must act with a higher standard of care. As a result, fiduciary advisors may be less expensive because client accounts aren’t charged commissions. A fiduciary advisor is important if you plan to give an advisor discretionary control of your account, if you aren’t sure what you need, and if you want sound, objective advice. When seeking wealth-planning strategies, it is important to bear in mind that not every firm providing financial advice is a fiduciary advisor.”

Are you concerned you don’t know enough about investing to do the right thing? Or are you concerned that you don’t know what you don’t know? In either case, you’ll want help.

You’ll need to make sure that this help works solely in your best interests.

Should this be the case, you’ll need to work with a fiduciary.