Financial advisors are people and services that help you create a plan for meeting your financial goals and manage it along the way. With the help of a financial advisor, you could reduce your debt, save more and invest in ways that might not have been possible if you did it on your own.
However, investment managers, financial consultants, financial planners and even digital investment management services called robo-advisors are all considered financial advisors. With that in mind, it’s important to consider whether or not the financial professional you hire is a fiduciary — that is, whether or not they are bound to act in your best interest.
A trusted financial advisor could help you plan for retirement and help you select investments that align with your financial goals. Find a qualified advisor today.
What Is a Fiduciary?
Legally speaking, a fiduciary is someone who is required to act in the best interest of someone else. Fiduciaries have a bond of trust with another person (called the beneficiary or principal) and have a legal obligation to act for the beneficiary’s benefit and not their own.
Banks, financial firms and individuals can all serve as fiduciaries, but not every service or person is bound by law to represent your best interest.
Are All Financial Advisors Fiduciaries?
A fiduciary is someone who has an obligation to act in your best interest. Financial advisor is a job title that anyone advising about your finances can use. If you’re in the market for a financial advisor, you should strongly consider a financial advisor who is a fiduciary, sometimes called a fiduciary financial advisor.
If a financial advisor does not have a fiduciary duty towards you as beneficiary, that advisor may recommend investments or products that pay them a higher commission instead of ones that would best fit your circumstances–potentially costing you more. You could pay more in up-front fees, your investments might not be a proper fit for your financial plans and in the end, the amount that you earn and save over your lifetime could be drastically different.
How Can You Be Sure Your Financial Advisor Is a Fiduciary?
First, you could simply ask. Most advisors will respond candidly if they are fiduciaries or not. There is even an organization, the National Association of Personal Financial Advisors (NAPFA), which requires affiliated financial advisors to be fee-only fiduciaries.
Second, you could verify if your financial advisor is certified or registered with certain groups or governing bodies.
A Registered Investment Advisor (RIA) is registered with the Securities and Exchange Commission (SEC) or a state bureau and effectively has a fiduciary relationship with clients. All RIA conflicts of interest and outside business activities will be listed on their Form ADV. Please note, though, that disclosing these interests legally fulfills an RIA’s specific obligations and therefore they can still recommend their business interests to investment clients.
On the other hand, a Certified Financial Planner (CFP) is a professional certified by the CFP Board who has passed extensive training and exams. CFPs are held to stringent standards and must uphold their fiduciary relationship with financial-planning clients or they will lose their certification.
A Chartered Financial Analyst (CFA) is another professional who has undertaken extensive training in investment management. Charterholders are also held to an ethical code that imposes a fiduciary relationship between the CFA and investment management clients. Both CFPs and CFAs will likely disclose their fiduciary obligations to their clients without prompting.
Fiduciaries are obliged to act in your best interest, whereas the title “financial advisor” implies no legal obligation. You should always ask if a potential financial advisor is a fiduciary, and you can verify this by checking the advisor’s Form ADV, which should disclose potential conflicts of interest, as well as any professional credentials and affiliations.
While no certification will ensure that your financial advisor is a fiduciary, your safest bet is to contract an advisor who is a CFP, CFA or affiliated with NAPFA.
Tips for Building Wealth
- Not sure what investments and strategies will help you retire early? For a solid, long-term financial plan, consider speaking with a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.
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