What is a Fiduciary

What is a Fiduciary?  According to Wikipedia, a Fiduciary is expected to be extremely loyal to the person to whom he owes the Fiduciary duty: he must not put his personal interests before that duty, and must not profit from his position as a Fiduciary without the consent of the person owed the Fiduciary duty.

Many investors are surprised that any professional advisor would practice at a lower standard. 

But the financial services industry can be divided into two camps: the salespeople and the Fiduciaries.  According to www.FocusOnFiduciary.com , a financial advisor held to a Fiduciary standard occupies a position of special trust and confidence when working with a client.  As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client.  This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

Following a Fiduciary standard is entirely different than how most so-called “financial advisors” work today.  More than 90 percent of financial advisors (salesmen) are paid fully or partially by commissions; this means that they have incentives to promote products and services that maximize their income.  These other advisors often work for large financial services firms, known as Broker-Dealers.  Brokers have only a duty to make sure that an investment is “suitable” for a client.  Not that they are selecting the “best” investment and putting the client’s interest ahead of their and their firm’s interest.  They actually CANNOT legally put the interest of their client ahead of their firm.  The loyalty of these advisors is legally to their employer, not their client.

So here are five questions to ask your financial advisor before working with them:

1. How are you and your firm compensated?
2. Will you disclose in writing to me your and your firm’s total compensation earned from my relationship?
3. Does any member of your firm have any financial interest in or receive any compensation from the investments you may recommend to me?
4. Are there financial incentives for you to recommend certain financial products?
5. Will you agree in writing to act as a Fiduciary when working with me?

It seems to me that all financial advisors should be legally required to put the interests of their clients ahead of their own.  Until they do, take it upon yourself to find someone who will.