Once you've decided to hire a financial advisor, it's easy to assume that he or she is going to be working in your best interest and that the recommendations he or she makes are going to help you in the long run. While you want your advisor to work for you, not for his or her bottom line, that's not always the case. In fact, there's only one way to guarantee that your advisor is definitely playing on your team, and that's to make sure he or she has a fiduciary duty to you.
What Fiduciary Means
A financial advisor who has a fiduciary duty to his or her clients, sometimes called being bound to a fiduciary standard, must act in the best interest of the client. When an advisor has a fiduciary duty to you, he or she needs to avoid any situations in which there is a conflict of interest, such as recommending you purchase a stock because the advisor will get a hefty commission if you do. As a fiduciary, your advisor has a duty of care, meaning that he or she needs to keep an eye on the investment and on your financial situation, and recommend changes when appropriate for you.
Although you commonly see fiduciary duty when people are talking about financial decisions, it's also an essential part of the attorney-client relationship and the relationship between a ward and guardian. When you tell your attorney something, you can rest assured that he or she will use that information to your advantage and not against you. The same should be true when you are working with a financial advisor.
Does Your Advisor Always Have a Fiduciary Duty?
Of course, nothing is so easy, and a person who calls him or herself a financial advisor might not actually need to uphold the fiduciary standard or act in your best interests. In some cases, an advisor might only need to uphold the suitability standard. An advisor working under the suitability standard needs only to make sure that a particular investment is "suitable" for you at the time of purchase.
He or she might review your financial situation, recommend a mutual fund or other investment vehicle, give you information on it, and be done. Since the investment was suitable for you at the time you purchased it, the advisor doesn't have a further duty to make sure it continues to work for you. Under the suitability standard, your advisor also doesn't have to reveal conflicts of interest, which can mean that he or she might steer you in one direction instead of another to improve the fee or commission he or she gets.
How to Know If Your Advisor Is Fiduciary
Since pretty much anyone can label himself a financial advisor, including brokers at a firm who want to make money for themselves and their employer, it's important to know what to look for in a fiduciary. One of the best things you can do is ask an advisor if he or she has a fiduciary duty or is acting under the fiduciary standard, and if he or she is willing to put that in writing.
Advisors with a fiduciary duty need to be registered investment advisors and should have the Series 65 license from the Securities & Exchange Commission. Finally, look at the fee structure your advisor charges. An advisor working under the fiduciary standard can charge on a fee-only basis, and can't work on commission.
