What is a fiduciary, and do I need one for my investments?
When it comes to getting help managing your financial life, transparency is the name of the game.
When you seek out financial advice, it’s reasonable to assume your advisor would put your best interests ahead of their own. But the truth is, if the investment advisor isn’t a fiduciary, they aren’t actually required to do so.
So in this guide, we’ll:
- Define what exactly a fiduciary is and how they differ from other financial advisors
- Consider when it can be important to work with a fiduciary
- Learn how to be a proactive investment shopper
What is a fiduciary, and what is the fiduciary duty?
A fiduciary is a professional or institution that has the power to act on behalf of another party, and is required to do what is in the best interest of the other party to preserve good faith and trust.
An investment advisor with a fiduciary duty to its clients is obligated to follow both a duty of care and a duty of loyalty to their clients.
The duty of care requires a fiduciary to act in the client’s best interest. Under the duty of loyalty, the fiduciary must also attempt to eliminate or disclose all potential conflicts of interest.
Not all advisors are held to the same standards when providing advice, so it’s important to know who is required to act as a fiduciary. Financial advisors not acting as fiduciaries operate under a looser guideline called the suitability standard.
Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but they neither have to put the clients’ best interests first nor disclose or avoid conflicts of interest so long as the transaction is considered suitable.
What are examples of conflicts of interest?
When in doubt, just follow the money. How do your financial advisors get paid? Are they incentivised to take actions that might not be in your best interest?
Commissions are one of the most common conflicts of interest. At large brokerages, it’s still not uncommon for investment professionals to primarily rely on commissions to make money.
With commission-based pay, your advisor might receive a cut each time you trade, plus a percentage each time they steer your money into certain investment companies’ financial products.
They can be motivated to recommend you invest in funds that pay them high commissions (and cost you a higher fee), even if there’s a comparable and cheaper fund that benefits your financial strategy as a client.
When is it important to work with a fiduciary?
When looking for an advisor to trade on your behalf and make investment decisions for you, you should strongly consider choosing a fiduciary advisor. This should help ensure that you receive suitable recommendations that will also be in your best interest.
If you want to entrust an advisor with your financials and give them discretion, you may want to make sure they’re legally required to put your interests ahead of their own.
On the other hand, if you’re simply seeking help trading securities in your portfolio, or you don’t want to give an advisor discretion over your accounts, you may not need a fiduciary advisor.
How to be a proactive investment shopper
Hiring a fiduciary advisor to manage your portfolio is one of the best ways to try and ensure you are receiving unbiased advice. We highly recommend verifying that your professional is getting paid to meet your needs, not the needs of a broker, fund, or external portfolio strategy.
Ask the tough questions:
- “I’d love to learn how you’re paid in this arrangement. How do you make money?”
- “How do you protect your clients from your own biases? Can you tell me about potential conflicts of interest in this arrangement?”
- “What’s the philosophy behind the advice you give? What are the aspects of investment management that you focus on most?”
- “What would you say is your point of differentiation from other advisors?”
Some of these questions may be answered in a Form CRS, which is a relationship summary that advisors and brokers are required to give their clients or customers as of summer 2020.
You should also know the costs of your current investments and compare them with other options in the marketplace as time goes on. If alternatives seem more attractive, ask your advisor why they haven’t suggested making a switch. And if the explanation you get seems inadequate, consider whether you should continue working with your investment professional.
Why is Betterment a fiduciary?
A common point of confusion is whether or not robo-advisors can be fiduciaries. So let’s clear up any ambiguities: Yes, they certainly can be.
Betterment is a Registered Investment Advisor (RIA) with the SEC and is held to the fiduciary standard as required under the Investment Advisers Act.
Acting as a fiduciary aligns with Betterment’s mission because we are committed to helping you build a better life, where you can save more for the future and can make the most of your money through our cash management products and our investing and retirement products.
I, as well as the rest of Betterment’s dedicated team of human advisors, are also Certified Financial Planners® (CFP®, for short). We’re held to the fiduciary standard, too.
This way, you can be sure that the financial advice you receive from Betterment, whether online or from our team of human advisors, is in your best interest.
