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Choosing a Financial Advisor – Part 2

A Four-Part Series

  1. Follow the Money – The Importance of Understanding an Advisory Firm’s Structure
  2. Trust but Verify – Make Sure Your Interests are Coming First
  3. Hiring the A-Team – Evaluating Talent and Resources Available to Serve You
  4. It’s a Match – Comparing Teams and Choosing your Best Fit

In our four-part Choosing a Financial Advisor Series, we provide information and perspectives to clarify the distinctions within the financial industry, which will help you understand how to think about choosing the right advisor for your specific needs.

In Part 2 of the series, we highlight the importance of making sure your interests come first, and explore the fiduciary standard.

Trust but Verify:

Make Sure Your Interests are Coming First

The term fiduciary has seen a resurgence in headlines lately because of proposed regulations affecting professionals offering financial and investment advice.

Before diving into the details and distinctions of the standards to which different types of advisors must adhere, it is important to understand your own specific needs and objectives. The relevance of these standards to your situation may depend upon type of advice or advisor relationship you are seeking.

SUITABILITY?

Historically, the standard of care that most financial advisors have followed is known as “suitability”. For advice to be considered merely “suitable,” the advisor must simply believe that a recommendation fits the client’s time horizon and willingness to take on risk. The suitability standard does not require advisors to put their clients’ best interests before their own, nor must they avoid conflicts of interest such as recommending a solution that pays a large commission.

In such an advisory relationship, a potential client should understand that while the financial advice they receive may be appropriate for their situation, factors other than their best interests may influence the advisor’s recommendation.

WHAT IS A FIDUCIARY AND WHY DOES IT MATTER?

In contrast, acting as a fiduciary means the advisor will act with undivided loyalty and utmost good faith and will not mislead clients. The fiduciary duty also requires the advisor to avoid conflicts of interest and disclose any potential conflicts of interest. Registered investment advisors regulated by the SEC are required to adhere to the fiduciary duty in providing objective advice. Before making a recommendation, fiduciaries must ensure recommendations are in the client’s best interest.

THE FIDUCIARY STANDARD DOES NOT “STANDARDIZE” THE LEVEL OR QUALITY OF SERVICES PROVIDED.

While all advisory firms held to the fiduciary standard must put clients’ interest before their own, the fiduciary requirement alone does not ensure the level or quality of services provided across firms are equal.

To properly assess the quality and rigor of services offered, prospective clients should evaluate a wealth management firm by the depth of its resources and expertise, and its capacity to provide services commensurate to their needs.

Next in our series, we’ll dive deeper into the topic of a firm’s capabilities, and when it matters most.

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