Duty of fiduciary financial advisor 08.03.2022
What is the definition of a fiduciary financial advisor, and why should you care? Here are 3 common considerations when deciding whether to partner with a fiduciary.
Duty of fiduciary financial advisor
Do you know that the only requirement a person needs to meet to be called a “financial advisor” is that they dispense financial advice? It’s true!.
While it is also true that most financial advisors at major Wall Street firms—also called “wire-houses”— WANT what is best for you, it is important to understand that they are employees first, and their FIRST professional obligation is to their employer, and NOT to you.
They are only required to do what is suitable for you, and they are bound by what is known as the “suitability standard of care.” They specifically are NOT legally required to act in your best interests 100% of the time. Put differently, they do not have the duty of fiduciary standard of client care.
In this video, Joseph Eschleman, an independent boutique wealth management firm, presents three important facts about how engaging a financial advisor specifically with a legal fiduciary responsibility should tilt the odds of success in your favor.
What is a fiduciary financial advisor – Definition of fiduciary
A fiduciary financial advisor is legally responsible for putting their clients’ personal and financial interests before their own, and always acting in their clients’ best interests –, 100% of the time. Three things to consider when choosing between a wirehouse or independent fiduciary financial advisor:
1. Fiduciary Standard v. Suitability Standard
2. Breach of Duty—Legal Recourse
3. Wall St. Investment Corp. vs Registered Independent Advisory Firm
1. Fiduciary Standard vs. Suitability Standard
The suitability standard, or simply doing what is suitable for a client, is much different than the fiduciary standard, or being legally bound to always act in a client’s best interests.
Investment brokers who work for broker-dealers (such as Merrill Lynch and Wells Fargo), and investment advisors who work for fully independent registered investment advisory (RIA) firms like Towerpoint Wealth, both offer financial, wealth, and investment planning, counsel, and advice.
However, they are NOT governed by the same professional standard.
Fiduciary advisors work directly for clients, and must place clients’ interests before their own, according to the Investment Advisers Act of 1940. They have the duty of fiduciary care. Investment brokers work for, and first serve, their broker-dealers, and must only ensure that their recommendations are suitable for their clients – this is known as the suitability standard.
A financial advisor with fiduciary responsibility provides fee transparency, and client-centered advice 100% of the time. A financial fiduciary advisor – deals with NO – competing interests, and is able to draw from a much larger pool of higher-quality investments.
2. Breach of Duty—Legal Recourse
A breach of fiduciary duty occurs when it is proven that a financial advisor failed to act responsibly or in the complete best interests of a client. Usually, the actions are alleged to have benefitted the advisor’s interests, or the interests of a third party, instead of a client’s interests.You have legal recourse in the case of a breach of fiduciary duty only if you are working with a fiduciary financial advisor.
3. Wall St. Investment Corp. vs Registered Independent Advisory Firm
If you have a relationship with an advisor who works for a major Wall Street firm, you do not have a fiduciary financial advisor. At Towerpoint Wealth, we should know – we worked for a major Wall Street firm for 18 years! It is impossible for anyone to act in a client’s best interests 100% of the time when operating within the constraints of the employee-employer relationship.
Now that you know the definition of fiduciary, it is important to understand that no designation, rule, or regulation will completely stop individuals who have the intent to defraud other people. Despite this sad fact, engaging a financial advisor who has a legal fiduciary responsibility to you, like all of us here at Towerpoint Wealth, tilts the odds greatly in your favor.
Learn about what questions to ask when hiring a financial advisor.
