There are some words in my vocabulary that most people in my profession hate to use.
The “f” word comes to mind as one such word. Most advisors I know hate the “f” word, but I love it!
I use it all the time…
- At home…
- In my office…
- At a restaurant…
Here’s why I love the “f” word, why I think it’s one of the best words in the financial planning industry, and why you should too!
What is a fiduciary?
The “f” word I’m referring to, of course, is “fiduciary” (pronounced “fih-doo-she-air-ee”).
What is a fiduciary, you ask?
The word, fiduciary, is actually a legal term. Dictionary.com defines it in the following way…
A person to whom property or power is entrusted for the benefit of another
In the financial industry, when an advisor claims to be a fiduciary, they are pledging to act in the client’s best interests, regardless of how it affects the advisor or their compensation.
An advisor claiming to be a fiduciary is akin to a physician pledging to “do no harm” and to always act in the best interests of their patient.
Surely, every advisor would want to be considered a fiduciary, wouldn’t they?
Is your advisor a fiduciary?
For most financial advisors in America, the word “fiduciary” is more like a curse word. The vast majority of individuals holding themselves out as “financial advisors” do not operate under what is known as a fiduciary standard of care.
Instead, they operate under something called the “suitability” standard, which basically means they aren’t legally required to make recommendations based on what’s in your best interests, but merely what might be “suitable” for someone in your situation.
This might seem like we’re splitting hairs, but consider the following analogy….
Imagine you’re planning a road trip and you have multiple routes available to reach your destination. Only one of these routes will get you there in the least amount of time and at the lowest possible expense.
The other routes will certainly get you to your destination, but may do so at an increased cost or by adding hours (or days) to your trip.
In other words, several routes are “suitable,” but only one route is the best.
As with most analogies, it’s not perfect, but hopefully it gets the point across.
Do you see how easily this can muddy the waters when searching for good financial and investment advice?
How to get financial advice that’s in your best interests
So, what’s an investor to do? How do you know if your advisor’s recommendations are in your best interests?
All you have to do is A-S-K…
1. Ask your advisor how they’re paid
Regardless of what standard of care an advisor operates under, a good advisor will be happy to show you EXACTLY how they are paid, who pays them, and any potential conflicts of interests involved with their compensation structure.
Hint: Many advisors operating under a fiduciary standard of care are compensated by the client and the client alone (this is known as “fee-only”). This helps remove many conflicts of interest that exist in “fee-based” and “commission-based” compensation models.
2. Sign a fiduciary oath
Ask your advisor to sign a fiduciary oath where they pledge to always make recommendations based on what’s in your best interests, regardless of how it affects them or their compensation.
Hint: Click here to see an example of the fiduciary oath I use with my clients.
3. Know how your advisor operates
Ask your advisor whether or not they operate under a fiduciary standard of care at ALL times, or just some of the time.
Hint: Your advisor should act as a fiduciary at ALL times, rather than a salesperson part of the time, and a fiduciary part of the time.
It really is that simple.
If you still have questions about what the “f” word is or why it is important, leave a comment below, or feel free to email me anytime!