Fiduciary is quite arguably the most important word in wealth management, yet few people are familiar with what it means. The word fiduciary originates from the Latin word, fidere, which means “to trust”. Fiduciary isn’t just a financial word, as it applies to any situation in which one person justifiably places confidence and trust in someone else and seeks that person’s help or advice in some matter. A Fiduciary must act in the best interests of the other person at all times.
In the wealth management world, fiduciaries have a legal duty to give advice that is solely for your benefit and in your best interest. Fiduciaries must put their own personal interests completely aside, in order to remain loyal to their fiduciary duty to you. If they violate this, they can be sued for breach of duty. Because of this, Fiduciaries tend to be the most educated practitioners in financial advising, as they must have the expertise to be confident that they can legally back up their advice to you. This, in turn, leads to a better wealth management result for you.
Unfortunately, less than 15% of financial advisors and advisory firms are fiduciaries, yet the majority of Americans think that ALL financial advisors are fiduciaries. Further complicating matters, in 2016, a new fiduciary rule was proposed, but never implemented, leaving many more people to believe that just about anyone in finance is a fiduciary. This misunderstanding causes many people to place their financial lives in the hands of financial advisors who put their own interests ahead of yours. These advisors are salespeople, and they are held to a suitability standard, which states that they must have reasonable grounds to believe that an investment product is merely suitable for you. This doesn’t mean that financial salespeople are bad per se, but it does mean that financial salespeople have no obligation to work in your best interest or disclose any conflicts of interest. Because of this, financial salespeople tend to be less educated than fiduciaries. This is in turn, tends to lead to a worse wealth management result for you.
Selecting a fiduciary firm and advisor is not easy, because many financial advisors will incorrectly say that they are fiduciaries when they are in fact not. In order to be sure that you are selecting a fiduciary to handle your wealth, it’s helpful to look at who isn’t a fiduciary. To meet the true definition of a fiduciary, the financial advisor and the firm must be your fiduciaries at all times, for all engagements. This distinction is important, since some advisors and firms will be your fiduciary for one item of wealth management, like financial planning, but not for investment management. If this is the case, then they are not your fiduciary all the time. In general, Stockbrokers, broker-dealer representatives, insurance agents are never full-time fiduciaries.
Financial Advisors and firms who are never fiduciaries all the time are listed below. This list is not exhaustive but represents the largest firms. If a firm is a brokerage or insurance company, they can never be your fiduciary. For example, if you are working with a financial advisor at Merrill Lynch or Northwestern Mutual, he/she is not your fiduciary all the time.
It’s important to note that some of these brokerage firms do have separate divisions that offer Fiduciary Trust services, for example, US Trust within Bank of America. In those limited engagements, you are working with a fiduciary, but you are also working with a separate company altogether. The vast majority of clients are not in such a relationship.
Finding out if smaller firms in your city are fiduciaries is a bit trickier, but here is how to do it. If it says anywhere on the website something like this, Securities offered through XYZ Securities, Inc. Member FINRA/SIPC, they can never be your fiduciary all the time. Further, firms that are fiduciaries all the time will be sure that you know it, so it will be prominently displayed on their website.
So, why wouldn’t all wealth managers and financial advisors want to be fiduciaries? Simply put, it’s because they don’t want the liability. Stating that you know what is best for someone requires tremendous expertise and confidence, and you are only going to take on such a responsibility when you are sure you can deliver. Therefore, when selecting a wealth management firm, it makes sense to choose one that will take on a fiduciary responsibility for you at all times, as it will most likely improve your result.