Fiduciary Financial Advisor |
What It Really Means
Fiduciary. You have heard it is an important term. But what does it really mean?
To understand who a fiduciary is, let's first examine who is not a fiduciary. A simple story makes this very obvious.
Example: Non-Fiduciary Car Salesman
Let's assume you are in the market to buy a new car. You do your research, check out various models and features, and decide a Toyota Camry is right for you.
You drive to your local Toyota dealership and express interest in a Toyota Camry.
After a quick test drive and upon deeper examination, you realize the Toyota Camry is not all that you thought it was. You ask the salesperson for their recommendations.
A non-fiduciary salesman would say: "No problem at all. We have plenty of other Toyota vehicles you can look at."
A fiduciary salesman would say: "No problem at all. We have plenty of other Toyota vehicles you can look at or there is a Honda dealership down the street. Maybe their Accord model will be a better fit."
The difference is obvious.
Non-Fiduciary Car Salesman
A non-fiduciary puts the interest of the company they work for first. In this case, the car salesman works for Toyota and has a duty to Toyota to sell their cars. They are restricted to meet your needs with the products the company offers.
Additionally, this car salesman has a financial incentive to sell you a car from the auto maker he works for. He receives a nice commission to do so.
Conversely, a fiduciary puts the interest of their clients first. In this (rare) case, the car salesman will try to make sure you find the perfect car for you, even if his company is not the right fit.
This car salesman is willing to forgo his commission to make sure you find the right car.
Now the chances of all car salesman becoming fiduciaries is non-existent. The reason is they do not need to be fiduciaries.
Here is why.
A Major Assumption
No one rationally assumes if they visit a Toyota dealership they could receive a recommendation to visit a Honda dealership instead. And no one rationally will think a Toyota car salesman can get in trouble for only offering his company's cars.
The reason is easy to understand. There is an assumption you have already done your research.
When buying a car, the moment you walk onto a dealers lot, the assumption is made you already know the only cars you will be shown will be the company's own.
This may be obvious for the auto industry. But believe it or not, the financial industry works the same way.
When you meet with a non-fiduciary financial advisor, the assumption is you have already vetted out all your alternative options.
Now you may see how this assumption is problematic. It's one thing to buy a car, another to need assistance with your life savings.
This topic right now is intensely debated.
Example: Non-Fiduciary Financial Advisor
Let's see how this plays out when working with a non-fiduciary financial advisor.
You don't know where to start, so you head to a well known insurance company that has a financial planning division. You feel comfortable you picked a brand name you recognize and trust.
You go through the entire process and it is now time for your advisor to present their recommendations.
What you end up with is a suite of recommendations to buy company products. Think life insurance, annuities, mutual funds, homeowner's insurance, and bank accounts.
Here is where the major assumption kicks in. The products you were offered may not be the best "advice" to get you to your goals, but because you (hopefully) already did you research, it is assumed you knew you were only going to be offered company products.
In other words, you knew by going with the brand you trust, you had no expectation to be offered anything other than what the company sold.
Non-Fiduciary Financial Advisor
If you transfer this assumption to your financial advisor, and put the responsibility on them to do the research and find what is best for you, well you have just created a fiduciary relationship.
Where The Responsibility Lies
The gapping hole that creates the difference between a fiduciary and non-fiduciary revolves around responsibility.
A Fiduciary is responsible to do the research, analyze your situation, and provide recommendations that solely benefit you.
A fiduciary does not assume you already know what you want. Even if you did, a fiduciary still has the legal obligation to make sure it is in your best interest.
Now you can see why finding a fiduciary when it comes to your finances is so important.
The standard of care when working with most advisors does not start at the top. It starts with you. If you decide to work with a company's financial advisor that will solve all your problems by selling their own products, it is not the company's fault if you ultimately find out there was a better solution available to you.
But by working with a fiduciary financial advisor, your standard of care does start at the top. Your advisor must do what is right, even if it means sacrificing any commission or payment they could receive.
A Stark Comparison
Now that you understand the difference between fiduciary and non-fiduciary, let's see how the advice you receive could vary based on who you work with.
Example: Saving For College Education
You have two kids, age 3 and 5. You take the proactive steps to start saving for their college education. Here is how the advice you receive could be different:
Non-Fiduciary Financial Advisor
For the non-fiduciary, the recommendation comes from the solution set offered. For most advisors in this situation, the solution set is a variety of insurance or investment based products.
Often times, the solution set comes with high incentives for the advisor to recommend. You would be amazed how many times I've seen life insurance recommended as a college savings vehicle.
In this case, the advisor chooses a life insurance policy as your best bet to save for college.
Lets contrast this with a fiduciary financial advisor:
Fiduciary Financial Advisor
In this case, since your advisor has an unlimited solution set, they can provide recommendations beyond just company products. They can find a solution that is unique or tailored to you.
The depth and breadth of your options is greater and more personal when you remove the restrictions of just one solution set.
Why All Advisors Are Not Fiduciaries
At this point, you may be wondering why all financial advisors are not fiduciaries.
The reality is, it can be very complex to become one. Here is a glimpse at what it takes:
One of the main responsibilities of a fiduciary is to remove as many conflicts of interest as possible. This often means the advisor owns their own firm and is independent.
An independent advisor has the luxury, but not the requirement, to partner with any company they choose. This allows the advice they provide to be pure in nature and not captive to one company.
Most independent firms are Registered Investment Advisers. RIA's for short, these firms are by law a fiduciary and must act in the best interest of their clients.
Part of being an independent advisor is you own your own business. To some, becoming a business owner and all that comes with it is not for them.
It can be easier for an advisor to hang their shingle with an established firm and receive a salary or commissions in exchange.
The Fiduciary Standard
I founded Derive Wealth to change the way financial advice is delivered. You now know what a fiduciary is. Here is what it actually feels like:
Derive Wealth Fiduciary Standard
My pricing structure is based on the complexity of the advice you need. There are 3 levels to select from: beginner, advanced and professional. Each level is charged a flat monthly fee, fully transparent and fully disclosed.
Conflict Free Advice
I do not sell any products or work on commissions. Surprisingly, this is not a requirement to be fiduciary. I elect to take an even higher stance to remove the conflict of interest that selling products brings.
As an independent firm, I can take my time through the financial planning process. You are not a sales goal but a relationship to me. Financial education and understanding is just as important as results. I like to say we move at the speed of comfort.
If you made it this far, you owe it to yourself to take the next step. Get in touch and learn more about how refreshing financial planning done right feels.
Derive Wealth is an independent, 100% fee-only financial planning firm located in Pasadena, CA. We specialize in creating personal financial plans designed to organize your life, get you to your goals, and take the worry out of your money. We don't sell products and don't work on commissions. Instead, we provide financial advice you can believe in.