One of the most talked about items in the financial industry today is what is a fiduciary and what questions a client needs to ask their financial advisor.
There may be various definitions of fiduciary depending on what industry you are referring to. In the financial planning industry, the Registered Investment Advisor (RIA) firms’ fiduciary authority resides with the Securities and Exchange Commission (SEC). According to the SEC article entitled “Fiduciary Duty: Return to First Principles,” the term fiduciary comes from the Latin word for “trust” – a fiduciary must act for the benefit of the person to whom he owes fiduciary duties, to the exclusion of any contrary interest.
The article continues on to describe the duties of an adviser, as that trustworthy fiduciary, has five major responsibilities when it comes to clients. They are:
- to put clients’ interest first
- to act with utmost good faith
- to provide full and fair disclosure of all material facts
- not to mislead clients
- to expose all conflicts of interest to clients
Additionally, the National Association of Personal Financial Advisors (NAPFA), the country’s leading professional organization for fee-only advisors, has developed high standards in the field and each advisor must sign and renew a Fiduciary Oath yearly and subscribe to their Code of Ethics.
Between the SEC and NAPFA, they have set the definition, the oath, and position for personal financial planners acting as fiduciaries.
What the Fiduciary Oath Means to You
A fiduciary, fee-only, non-commission financial planner brings special benefits to the client. The oath that is taken is a written oath prepared by NAPFA and signed by the planner. The major benefits to the client include:
- The advisor shall always act in good faith and with candor
- The advisor shall be proactive in the disclosure of any conflicts of interest that may impact the client
- The advisor shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product
If your Financial Professional is Not a Fiduciary
According to the SEC, there are many financial advisors, wealth managers, insurance agents, and other finance professionals that do not adhere to the fiduciary standard. The SEC now requires brokers and other professionals who are not considered fiduciaries to add the following disclosure:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time.”
If this disclaimer appears, you should ask questions, obtain complete disclosure, understand their compensation model, and determine if the relationship with the financial professional is in your best interests.
The Major Compensation Models
Commission-based finance professionals receive compensation by the sale of certain financial products such as insurance, annuities or other products. Their business model may be one of “suitability” – meaning that a product recommendation merely needs to be suitable for the client, not necessarily in the best interest of the client.
Fee-based finance professionals also exist in the finance industry. Fee-based refers to a compensation model that is both commission-based and some fee structure for certain services.
A fee-only finance professional that is a Registered Investment Advisor (RIA) or a NAPFA member carries the distinction of always performing their finance practice as a fee-only fiduciary. The advantage to the client of the fee-only compensation model is that the fee is set up front and the client will know the cost of the scope of services and deliverables (reports) being provided.
Questions You Can Ask
Ask a lot of questions about the compensation of your current financial advisor and the advisors that you are interviewing so that you understand how they are compensated. You have a right to know about and understand any conflicts of interest that any financial advisor may have. If your advisor is compensated based on what financial products you buy, make sure you understand and are comfortable with that arrangement.
About Kastler Financial Planning
Our core purpose is to improve the financial life for each and every client we serve. We believe that people of all income levels should have access to affordable and professional financial planning and investment management services, without the pressure or bias of product sales and commissions. Always acting as a fiduciary, the only fee we receive is the fee paid by the client. We put your best interest before our own. No product sales, no commissions, and no account minimums.
We specialize in family planning, families with Special Needs Planning, Retirement Planning, Retirement Tax Planning, and Small Business Retirement Plan Consulting. Our services are analytical and will be appreciated by the engineering and technical-minded individuals. We also use “bubble up” reports for the not-so-technically minded.
Our services can be performed either as hourly, a one-time fee-only project, or as On-Going Financial Planning, depending on your needs. Compare our fee-only services. Our suite of services also include Investment Management Services with the options of % AUM or flat-fee portfolio management.
We aim for a pleasant client experience whether you are in our office or remote across the country through computer screen sharing technology. Visit our Client Portal to learn how to get started with a complimentary ‘Get Acquainted’ meeting.
If you have any question on how our services may apply to you, please contact me at the number below or submit an email through our Contact Us form.
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