Fiduciary Financial Advisor

What Does It Really Mean?

Selecting a Financial Advisor to work with is a major life decision. Where to start is often a daunting task. A simple way to narrow your selection is making sure your financial advisor is a fiduciary.

Example: Non- Fiduciary Car Salesman

To understand the term fiduciary we can use the example of a car salesman.

You are ready to buy a new car. After doing some research and checking out various models online, you decide a Toyota Camry may be right for you.

Next you head 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."

Here is where the fiduciary example hit home: the car salesman may know that another make and model outside of Toyota may be a better fit. But they have no obligation, or fiduciary duty, to do so. Their only responsibility is to make sure you find the right Toyota model.

You may think this is obvious (which it is). As soon as you step onto a Toyota lot, there is no expectation to offer a competitor’s car.

Interestingly, the financial advice industry works under the same assumptions.

If you work with a life insurance agent that offers financial advice, the assumption is made that the client understands they will only be offered insurance products.

Fiduciary Car Salesman

Furthering the above example, 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."

That conversation will never happen in real life, but should provide context on how a fiduciary financial advisor must act.

A non-fiduciary puts the interest of the company they work for first.  A fiduciary must put your interest first.

A non-fiduciary car salesman has a duty to Toyota to sell their cars.  They are restricted to solving your needs with only proprietary company cars.

Conversely, a hypothetical fiduciary car salesman must put the interest of the buyer first. The car salesman will try to make sure you find the perfect car for you, even if his company is not the right fit.

A Major Assumption

The above example is extreme. 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.

This may be obvious for the auto industry but a huge leap in assumption for individuals looking for financial advice.

When you meet with a non-fiduciary financial advisor, the assumption is you have already vetted out all your alternative options.

You can see how this assumption is problematic.  It's one thing to buy a car, another to need assistance with your life savings.

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 that 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 your research, it is assumed you knew you were only going to be offered company products by engaging with an insurance company.

In other words, you knew by going with the brand you trust, you had no expectation to be offered anything other than the company’s suite of products.

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.

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 afterwards.

However, 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.  

Now that you understand the difference between fiduciary and non-fiduciary, let's see how the advice you receive could vary based on real life decisions.

Example: Saving for College

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:

From the non-fiduciary advisor, the recommendation comes from the company products available. 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:

Since a fiduciary advisor must investigate all options, they offer a 529 college savings plan, a bank savings account, or suggest paying off high interest credit cards as a better option.

The depth and breadth of your options are greater and more personal when all avenues are pursued.

Don’t Settle for Less

Your work extremely hard for your money. Don’t take the easy way out and work with any advisor. Find a fiduciary financial advisor to make sure your best interests are looked after.