Are you thinking about hiring a financial advisor? In this article, I’m going to explain why you may want to look specifically for a fiduciary financial advisor. At the end, I will share ]the two best websites where you can find a good fiduciary financial advisor.
What is the fiduciary standard?
The fiduciary standard states that an advisor must put their client’s interest above their own. A fiduciary will avoid conflicts of interest. If it can’t be avoided, s/he will clearly disclose these to the client. A fiduciary’s advice is the result of a thorough analysis.
What is a fiduciary financial advisor?
Let’s say you get a bad ankle sprain and the doctor tells you that you need to get an x-ray, get crutches and go to a physical therapy session for your ankle to completely heal.
When you’re receiving advice from your doctor, you don’t really wonder if your doctor is telling you to do these things because she’s going to get a commission, right? You trust that your doctor wants your ankle to heal so you can walk again. You know that your doctor is acting in your best interest.
That’s what a fiduciary is. Someone you trust to act in your best interest.
If you’re looking for someone you can trust when it comes to your money, look for a fiduciary financial advisor. Let me share with you three reasons why you should choose a fiduciary financial advisor.
1) A fiduciary advisor wants to help maximize your money
A fiduciary financial advisor will act in your best interest, just like your doctor. He or she will be in your corner. A fiduciary financial advisor will want to help you maximize your money, will want to help you make smart financial decisions, and will want you to achieve financial freedom. Your goals become the advisor’s goals as long as they’re good for you.
2) A fiduciary financial advisor avoids conflicts of interest
Let’s say your advisor tells you, “Based on your situation, you should refinance your student loan.” If you’re working with a fiduciary financial advisor, it’s probably because your student loan interest has a high interest rate. You’re probably also not eligible for Public Service Loan Forgiveness and maybe your advisor thinks you can get a lower rate if you refinance your student loan. Your fiduciary financial advisor is not giving you that advice because he or she is going to get some kind of commission from that student loan refinance deal.
Let’s say your advisor tells you, “Based on your three goals of wanting to buy a house, wanting to travel frequently, and starting to save for your child’s college, you can afford to buy a $700,000 house without derailing your other two goals.” If you’re working with a fiduciary financial advisor, she’s telling you that because she’s crunched the numbers and this is likely what’s best for you. You can be sure that the advisor is not getting a commission from that $700,000 house purchase.
3) A fiduciary advisor is not tied to a specific company
A fiduciary financial advisor can look at the entire marketplace and choose the best financial products out there for you. Your advisor might say, “We should open your IRA at this financial institution because you can get access to zero fee funds there. You should open a high yield savings account in this other financial institution because they give consistently high rates. And you should open a 529 account in this place because you can get a state tax deduction if you contribute and you have access to good low-fee funds in that 529 plan.” This allows you the opportunity to work with someone who has a wide area of solutions. They’re not tied to a specific company and can choose the best financial product out there for you.
What are the 5 fiduciary duties of a financial advisor?
Fiduciary financial advisors must:
- Place the interests of the Client above the interests of the financial advisor and the advisor’s firm;
- Avoid conflicts of interest, or fully disclose material conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict;
- Act without regard to the financial or other interests of the financial advisor, the advisor’s firm, or any individual or entity other than the Client;
- Act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances; and
- Comply with all objectives, policies, restrictions, and other terms of the engagement and all reasonable and lawful directions of the client.
How much does a financial advisor cost?
Fiduciary financial advisor fees are either fixed monthly fees or a percentage of your assets being managed by the financial advisor. Fixed fiduciary financial advisor fees typically range from $250 to $1,000 per month. If the advisor charges a percentage of assets under management, the typical fee is 1%, and can range from 0.5% to 1.75%. It’s a highly fragmented market where there are lots of financial advisors charging significantly different rates. So make sure you do your research to get the best value.
Are all financial advisors fiduciary?
Only a small fraction of financial advisors are fiduciary. Most advisors get commissions on investment funds or insurance products sold to clients, and usually have a conflict of interest. A non-fiduciary advisor is not required to act in your best interest.
What does working with a non-fiduciary advisor look like?
Let’s say your advisor works for a big box firm and he tells you, “Hey, I think you should invest in this mutual fund. It did really well last year.” What if you knew that he actually gets a bonus for recommending that fund to you once you invest there? That’s so not cool. You might question whether this fund is really good for you, or for them. In fact, many large brokerage firms give an incentive to their advisors for steering clients into their own proprietary funds or products.
If you’re really into statistics and numbers, there is a 2014 report that was produced by the White House Council of Economic Advisors. This report revealed that this conflicted advice with all these hidden kickbacks and fees is costing middle-class and working families $17 billion a year. $17 billion a year!
So, which would you rather work with, a non-fiduciary advisor who is not required to act in your best interest and who may be getting some type of incentive for steering you towards a particular product, or a fiduciary financial advisor who is there looking out for you, acting in your best interest?
Is a fiduciary financial advisor worth it?
A fiduciary financial advisor can give you sound, unbiased advice on investments, retirement planning, taxes, college savings, and numerous other tips that can help maximize your money.
A fiduciary financial advisor can also provide organization, accountability, proactivity, education, and partnership.
In the end, only you can decide if receiving all these services is worth it for you.
How to find a fiduciary financial advisor near you
NAPFA stands for the National Association of Personal Financial Advisors and is the oldest fiduciary financial advisor website. XYPN is newer, and XYPN advisors have the CFP® designation and offer virtual financial planning services.
District Capital Management is a proud member of NAPFA and XYPN. If you’re interested in working with a fiduciary financial advisor, you can schedule a free discovery call here.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.