For years, I have listened to my Dad tell just about everyone he meets that he is a financial advisor. For the man sitting in the aisle seat on the airplane, there is no difference between the financial planner that receives commission off security sales and those that are considered a fiduciary. Many people I encounter are unaware of the differences in financial advisors. To be completely honest, I had no idea there was a difference. In the short six months I have worked here at CPS Investment Advisors, I have learned about fiduciaries, broker-dealers and all of those in between. I was born and raised here in Lakeland, Florida and I have come across many advisory firms. What is interesting to me is that these firms are structured differently but they offer similar services. So, what sets them apart?
I have read numerous articles debating the idea of a fiduciary vs. fiduciary- like financial advisors. Sure, I would like to be able to trust my advisor to “do the right thing,” but why shouldn’t it be required? I want to work with an advisor that has a duty to care for my financial needs (and ultimately me as a person), is transparent with any conflicts of interest that may arise, and will continue to provide services with my absolute best interest in mind, no questions asked.
The definition of a fiduciary is “holding in trust.” As a fiduciary, our clients trust us to act in their best interest and choose investments that will benefit the client, not the advisor. A fiduciary will disclose important facts and figures, avoid conflicts of interest, and make decisions that benefit you as the investor, NOT the individual advisor or the firm. Fiduciaries monitor the performance of investments and with the client’s full trust, make financial decisions that they feel are beneficial. The fiduciaries’ services also extend past just investments. They are here to stay and become an important part of your financial future. This is where the ultimate standard of care comes into play: the duty to care. It is a fiduciaries’ responsibility to make decisions in your best interest throughout your financial relationship, not just at the time of the initial transaction.
So how do fiduciaries get paid?
To be defined as a fiduciary, you are required to be fee-only or fee-based. Fee-only means the advisor is compensated based off a flat fee which is always disclosed. An important term, independence, comes into play here. When an advisor does not receive compensation from an investment, they are completely independent from the investments they are purchasing. They are truly acting in the client’s best interest.
Another way a fiduciary is paid is fee-based. This compensation plan means the advisor is compensated based on a percentage of assets. It is important to ask about the compensation structure of the firm you are interviewing. Full transparency on how the advisor and advisory firm are compensated is required if they are a fiduciary. Any advisor for a firm who has trouble disclosing this information may not have your best interest at heart.
If the advisor is commission-based, they are not a fiduciary. Non-fiduciaries receive commissions from certain investments that they purchase or continuously trade. The presence of commissions can remove independence and the investor may not be given advice in their best interest. Commissions are a conflict of interest as advisors may be more likely to purchase an investment where they will receive a higher kickback and compensation.
Finding your best fit is about finding the right pair of pants. Finding the right financial advisor is about finding a fiduciary. Asking the right questions and understanding the different structures of financial advisory firms is important to your financial future! We are here to help!
Erin E Golotko | MBA