Fiduciary: The Most Important Financial Term You've (Likely) Never Heard Of

If you’ve ever searched the internet for advice on selecting a financial advisor, you’ve probably seen professional counsel to only hire an advisor who acts as a fiduciary. In fact, it is often the first item of consideration from many of these experts, as shown here, here, here, and here. Why is working with a fiduciary as your financial advisor so important? In our several decades of combined experience, too few prospective clients understand the fiduciary relationship, its importance, and the risk they assume when hiring an advisor without it.

A fiduciary is someone who has a legal obligation to put your financial interest above their own. Fiduciaries cannot conceal any conflict of interest and must be transparent with expenses and fees, while demonstrating why their advice is in your best interest. When your financial advisor is a fiduciary, they must hold to this standard of service. Make sure your advisor will not only claim to be a fiduciary, but is willing to put it in writing.

Contrast that with the “suitability” requirement, which is the lower federal standard to give financial advice. To remain in compliance, advisors must only demonstrate that their advice was suitable to the client’s unique circumstances. To illustrate the pitfalls, it would be perfectly legal for an advisor to sell to a client a high-expense but underperforming mutual fund in lieu of a low-expense but better performing fund. Nevermind that the first fund pays a 1.5% commission to the advisor, so long as it suitable for the client’s goals and risk tolerance, it’s legal. A common tactic is to provide a low-cost financial plan to get a client in the door, followed by selling high-commission annuity contracts, mutual funds, and life insurance plans. Like a used car salesman will first try to sell you the highest-paying vehicle on the lot, it can be hard to trust how hidden incentives are shaping the advice of your financial professional if they are not a fiduciary.

If an advisor is a fiduciary, it hints at their pricing structure. If the advisor accepts commissions from a third party in any form, it becomes very hard to demonstrate that their advice was not colored by those conflicts of interest. So, virtually all fiduciary advisors embrace a fee-only pricing structure. This ensures the advisor is paid only by the client, not by third party vendors for using their product.

A fiduciary relationship combined with a fee-only pricing structure is the foundation for a long-term relationship based on trust. A trusted and expert advocate can be invaluable in reaching your long-term goals, so it’s very important to make the right choice. It is still important to perform your due diligence on the advisor’s philosophy, skill, process and experience, but you drastically increase your chance of success by choosing only between fiduciaries.

At TrueNorth Wealth, we are fee-only fiduciaries dedicated to our client’s goals. Find out more about how a dedicated financial advocate can improve your long-term financial outcomes and relieve your financial stress - learn more about our Financial Advisor Services.

Related Reading:

4 Financial Planning Considerations Before Getting Married

4 Things to Know About “Robo-Advisers”

How to Save Your First Million on an Average U.S. Income

Choosing a Financial Advisor: The Questions You Need to Ask

4 Financial Questions for Engaged Couples