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Is A Fiduciary Financial Advisor Right for You?

But First... What is a Fiduciary Financial Advisor?

But First... What is a Fiduciary Financial Advisor?

Fiduciary financial advisors are legally and ethically required to work in the best interests of their clients. Their responsibilities are similar to those of financial advisors, however, their fiduciary status means that there are consequences if they breach their legal duty of acting in their client's best interest.

The fiduciary standard is the highest legal obligation that one can have to another person. When a financial advisor is a fiduciary, they are obligated to provide clients with the best prices, terms, relevant facts, and updates to keep them informed about their assets.

Are All Financial Advisors Fiduciaries?

No, not all financial advisors are fiduciaries.

Those who work for brokerage firms aren’t typically fiduciaries. Fiduciary financial advisors typically work for Registered Investment Advisors, or RIAs.

Unlike many other financial advisors and firms, RIAs have to act under fiduciary duty because they are either registered with the Securities and Exchange Commission (SEC) or state securities regulators.

An investment adviser representative, or IAR, is a financial professional who works under the umbrella of an RIA. IARs are one type of fiduciary financial advisor that requires certain accolades to practice. To become an IAR, an individual must either:

  • Pass the Series 65 exam, or
  • Pass both the Series 7 and Series 66 exams

In some states, professionals may be able to use a designation like CERTIFIED FINANCIAL PLANNER (CFP®) or Chartered Financial Analyst® (CFA®) instead of passing the Series 65. It's important to note that not all CFP® and CFA® professionals are IARs, and not all IARs are CFP®s or CFA®s.

To know if your advisor is a fiduciary, double-check with them before working with them.

What Are the Types of Fiduciary Financial Advisors?

There are several types of fiduciary advisors offering different specializations and expectations for client relationships. These include:

  • Fee-only fiduciaries charge a flat rate, an hourly fee or a percentage of assets under management (AUM).
  • CERTIFIED FINANCIAL PLANNER™ (CFP®) fiduciaries are held to the fiduciary standard when they are providing financial planning. Note: being a CFP® does not automatically make an advisor a fiduciary.
  • Registered investment advisors (RIAs) are always fiduciaries in accordance with the Securities and Exchange Commission's Investment Advisers Act of 1940.
  • Department of Labor (DOL) fiduciaries provide investment advice to retirement investors, including 401(k) plan participants or individual retirement account owners. As long as the advice given is tied to a retirement account, the DOL requires these advisors to act as fiduciaries. If they start advising on nonretirement, however, the DOL no longer (legally) requires advisors to act as fiduciaries.
  • Voluntary fiduciaries are not necessarily registered with the SEC or DOL but have pledged to adhere to the fiduciary standard.

What Happens If Fiduciary Duty Is Breached?

There are consequences if a fiduciary breaches their legal duty to act in their client's best interest. A breach of fiduciary duty could involve:

  • Making an exorbitant number of trades to make commissions (account churning)
  • Exchanging investments without permission
  • Using a client account to purchase stocks
  • Negligence
  • Not communicating conflicts of interest linked with investments
  • Misrepresentation, or making an untrue statement about a transaction.

When fiduciary advisors breach their duty, they can be subject to civil liability and professional disciplinary sanctions. This could involve a suspension from practice, or the advisor might be barred from the industry.

If you think your financial advisor breached their fiduciary duty, you'll want to end the relationship immediately. If you experienced damages due to the breach of fiduciary duty, you may be able to file a civil claim to recoup those damages. Filing a claim will require proof that your advisor is a fiduciary, they breached their duty of care and you incurred damages due to the breach. If your claim is successful, you may be awarded damages. The advisor will face disciplinary action, such as being ordered to pay a fine. They will also have disciplinary action added to their record, which can damage their reputation and career.

Should You Work with a Fiduciary Financial Advisor?

It might be helpful to hire an advisor if:

  • You recently inherited money or assets
  • You want to begin investing
  • Your employer offers a 401(k) and you want to compare options
  • You need to re-manage your assets (like after a divorce)
  • You are considering starting or restructuring a small business
  • You are approaching retirement
  • You want long-term management advice for a house or other investment
  • You want to create a trust fund or begin estate planning
  • You need to help a close relative with their finances
  • You need a second opinion on your financial habits and investments
  • You want to create a college or medical fund for a dependent

Many fiduciary financial advisors are available for introductory consultations, where you can ask any questions and get a feel for their advising style. Consider meeting with a few different advisors before deciding on who to work with.

Looking for a Fiduciary Financial Advisor in Houston?

Do you live in the Greater Houston area and want to work with a fiduciary financial advisor? Our team here at Totus Wealth Management is full of dedicated fiduciaries who can help you develop a financial strategy that helps you navigate complexities and pursue your goals. Reach out to learn more.

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