Are you thinking about hiring a financial advisor? Finding one you can trust who works in your best interest can be challenging. In this article, I’m going to tell you why you may want to look specifically for a fiduciary financial advisor. I have a bonus tip at the end where I will share one of the best places that you can go to to find a good fiduciary financial advisor.
What is a Fiduciary Financial Advisor?
You’re probably asking “what in the world is a fiduciary, and what has that got to do with my search for a financial advisor?” Well, I used to play a lot of basketball, it’s one of my favorite sports, and one time I was playing a pickup game, I took a shot, landed on someone else’s foot, and twisted my ankle really bad. I went to the doctor and the doctor said, “You need to get an x-ray.” I also needed to get some crutches afterward. The doctor also told me I needed to go to a physical therapy session for it to completely heal.
So, when I was hearing that advice from my doctor, I wasn’t sitting there wondering if she was recommending me to get an x-ray and the PT sessions because she’s going to get a kickback from those sessions or if she is trying to sell me crutches because she’s going to get a commission? No, I’m not thinking about that because I trust that my doctor is giving me that advice because she wants me to get well, she wants my ankle to heal so I can walk again. My doctor is a fiduciary and I know that she is acting in my best interest.
That’s what a fiduciary is. Someone who has a sworn oath to act in your best interest. You’re probably looking for an advisor because you want to maximize your money. You want to make smart financial decisions and you want to achieve financial freedom, right? So let me share with you the three reasons why you should choose a fiduciary financial advisor.
A fiduciary advisor wants to help maximize your money
The first reason is that a fiduciary financial advisor will want to help you make smart financial decisions, and will want you to achieve financial freedom. A fiduciary will act in your best interest, just like your doctor. Your financial goals become the advisor’s financial goals as long as they’re good for you.
A fiduciary financial advisor avoids conflicts of interest
So let me give you an example. Let’s say your advisor tells you, “I think based on your situation, you should probably refinance your student loan.” Most likely 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, and thus lower your monthly payment, or maybe pay it off faster. 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.
Here’s another example. Let’s say your advisor tells you, “based on your three goals of wanting to buy a house, wanting to travel frequently, domestic or abroad, and starting to save for your child’s college, you can afford to buy a $700,000 house without derailing your other two goals.” Most likely for working with a fiduciary financial advisor, she’s telling you that because she’s crunching numbers and this is what’s best for you. You can be sure that the advisor is not getting a commission from that $700,000 house purchase.
A fiduciary advisor is not tied to a specific company
What does that mean? Well, she or he can look at the entire marketplace and choose the best financial products out there for you. Your advisor might say, “I think we should probably open your IRA at this financial institution because you can get access to zero-fee funds there. And while we’re doing that you should probably open a high yield savings account in this other financial institution because they give consistently high rates. And you should probably 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 does working with a non-fiduciary advisor look like?
The last thing I’d like to do is give you a sense of what working with a non-fiduciary financial advisor might look like. By the way, non-fiduciary advisors are a huge majority of financial planners out there, so you really need to be careful. Simply put, a non-fiduciary advisor is not required to act in your best interest. Think about that for a moment, a non-fiduciary advisor is not required to act in your best interest. How crazy is that?
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.” And 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 actually good for you, or for them. And 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 actually a 2015 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 or, and who may be getting some type of incentive for steering you towards a particular product, or a fiduciary financial advisor who is out there looking out for you, acting in your best interest?
I promised to give you a bonus tip, so here it is. If I’ve convinced you to look for a fiduciary financial advisor, where is the best place to look for one? My recommendation is for you to go to NAPFA.org . NAPFA stands for the National Association of Personal Financial Advisors. Once you go to the website, you can just type in your zip code and several firms in your area, all fiduciary financial advisors, will pop up.
District Capital Management is a proud member of NAPFA and we’ll be happy to help you out if you so choose to work with a fiduciary financial advisor. Now, if you’ve managed to find a couple of prospective financial advisors and you have a Zoom call with them sometime in the next few weeks, what do you think are the questions that you will want to ask to find the best fit, the best fiduciary financial advisor out there? Check out our video on 4 Questions to Ask a Potential Financial Advisor.
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 middle-class professionals 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.