What is a Fiduciary and Fee-Only Financial Planner?

If you’re considering hiring a financial planner or financial advisor, it’s important to understand the difference between a salesperson and a fiduciary.

A salesperson is someone who is selling a particular product to make a profit for themselves and/or their employer. They are frequently paid a commission on what they sell, which is a percentage of the profit the company makes on that product. In finance and investing, many financial advisors are a salesperson paid by commission. The products they sell can be a mutual fund, a bond, an annuity, a life insurance policy, or other type of investment. Each of these investment products has fees associated with them, and those fees are how the investment company that makes and offers that product makes a profit. Those fees are also how the financial advisor makes their commission, and sometimes they also receive additional kickbacks and incentives from the investment company. That presents a conflict of interest because even though a particular mutual fund being offered to you may generally be a good product and suitable for your risk profile and personal situation, there could very well be another mutual fund that offers a similar return with lower fees, but is not offered to you because it pays a lower compensation. So it’s actually costing you more money and reducing your return on your investment. And sometimes there’s an entirely better product (such as an ETF) that offers a better return with lower fees and other benefits, but isn’t being offered to you because it doesn’t pay as much compensation to the financial advisor.

This is where a fiduciary comes in. A fiduciary puts their client’s best interests before their own. A fiduciary avoids conflicts of interest whenever possible and discloses any potential conflicts of interest to their clients. A fiduciary acts in good faith and presents all relevant facts to their clients. A fiduciary does their best to ensure the advice provided to clients is accurate and thorough. A fiduciary avoids using a client’s assets to benefit themselves, such as purchasing securities for their own account before buying them for a client.

FIDUCIARY DUTY

Fiduciary duty is a legal responsibility to put the interests of another party before your own. If someone has a fiduciary duty to you, they must act solely in your best interests. A fiduciary cannot recommend a strategy that provides a bigger kickback when there is a better strategy for you that has a smaller kickback or no kickback at all. Fiduciary duty is important for guiding the actions of financial professionals who deal with a client’s money.

While fiduciaries must put their client’s best interests before their own, financial professionals such as broker-dealers and insurance agents who adhere to the suitability standard must only provide suitable recommendations. They only need to consider your financial situation, goals, and risk tolerance, while keeping costs from being excessive. They may still suggest products that aren’t necessarily the best product in your best interest with the lowest fees, and may recommend products that pay them more than other products, but have higher costs for you.

HIRE A FEE-ONLY FINANCIAL PLANNER WHO IS A FIDUCIARY

A good way to choose a fiduciary financial planner is to hire one who is a fee-only financial planner. Being a fee-only financial planner helps ensure that conflicts of interests have been minimized. Fee-only financial planners are paid by their clients directly and do not receive any commission or kickbacks from any of the products they recommend. Having a fee-only financial planner working for you will help ensure that your investments will have lower costs which will help improve the overall bottom-line return performance of your portfolio.

Note that fee-only is different from fee-based. Fee-based financial planners receive most of their revenue and income from clients directly, but may also receive commissions on products, especially insurance products such as life insurance and annuities. Fee-only financial planners do not receive any compensation from selling any particular product at all, ever.

HOW DO YOU KNOW IF A FINANCIAL PLANNER OR ADVISOR IS A FIDUCIARY?

All financial planners that are investment advisors registered with the SEC or with a state securities regulator must act as a fiduciary. However, broker-dealers, stock brokers, and insurance agents are not obligated to act as a fiduciary and are only required to make sure the investment is suitable.

You can check if a financial planner or financial advisor is a fiduciary. NAPFA members are fiduciaries. CFP-certified professionals are fiduciaries. Members of the Fee-Only Network are fiduciaries. And certain other designations and certifications (such as CRPC and APMA) require adherence to fiduciary duty. You can also ask the financial planner or advisor. It is likely that if they are a fiduciary and/or fee-only their website will say so or they will let you know.

Escient Financial is a fee-only fiduciary investment advisor registered with the State of California. I, Mike Halper, am a fee-only fiduciary financial planner and an investment advisor representative registered with the State of California. If you’re looking for a financial planner, feel free to...