When it comes to seeking financial advice, it’s important to understand the difference between fiduciaries and non-fiduciaries. Having a fiduciary on your side can provide you with the expertise and guidance that best suits your situation, making them a better choice over a financial advisor who is not a fiduciary.
Here are the distinctions between a fiduciary and a financial advisor, along with what you should know.
Understanding Fiduciaries
A fiduciary is an individual entrusted with the affairs of another, bound by law or oath to prioritize their client’s interests over their own. This foundation of trust is essential for clients to rely on their fiduciary completely.
A fiduciary can be anyone with expertise, such as a lawyer, trustee, or financial advisor, who must provide advice or act on behalf of a client.
Defining Financial Advisors
A financial advisor offers a range of financial services and advice, including retirement planning, investment management, budgeting, and estate planning. They can create a financial plan to help you build wealth.
Financial advisors encompass various specialties, such as investment advisors, wealth managers, or certified financial planners (CFPs). Some may also act as salespeople promoting the products and services of financial institutions.
Key Differences Between Financial Advisors and Fiduciaries
- Duty of care
- Fiduciaries have a high duty of care for clients, always prioritizing the client’s interests. Financial advisors may adhere to a suitability standard, ensuring advice is suitable for clients rather than the best option for their financial situation.
- Area of practice
- Fiduciaries operate in various domains beyond finance, while financial advisors focus on assisting individuals with managing their finances.
- Cost
- Financial fiduciaries may not cost more than financial advisors, as their payment structure often aligns incentives. Advisors can be compensated through flat fees, hourly rates, or a percentage of assets under management.
For the best financial advice, seek an advisor who works in your best interests, ideally a fiduciary with a fee-only structure. Use Bankrate’s advisor matching tool to connect with local advisors.
Identifying a Fiduciary Financial Advisor
To ensure your financial advisor is a fiduciary, simply ask them directly. If they cannot confirm their fiduciary status, it’s best to avoid working with them. Request written confirmation and be cautious of advisors who are not transparent about their fiduciary responsibilities.
Understanding how your advisor is compensated is also crucial, as it reveals potential conflicts of interest. Seek recommendations from trusted sources and ask detailed questions to ensure you’re aligned with the right advisor.
Choosing Between a Financial Advisor and Fiduciary
For significant financial decisions impacting your security, a fiduciary advisor is essential for unbiased advice. Non-fiduciary advisors may offer good advice at times, but without a fiduciary standard, their recommendations may not always prioritize your best interests. It’s crucial to have an advisor who consistently acts in your favor.
Consider these tips for finding the right financial advisor tailored to your needs and avoiding potential pitfalls.
Conclusion
Ensuring your financial advisor is a fiduciary is a vital step in receiving reliable advice. Understanding their compensation structure is equally important to gauge their alignment with your best interests.