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What is a Fiduciary Relationship? Thumbnail

What is a Fiduciary Relationship?

Investors have options when choosing a financial advisor to help them develop and implement their investment and retirement income plan. Important factors include how the advisor is compensated and are they acting in a fiduciary capacity.

We have three learning objectives for this post:

  1. To understand the difference between a fiduciary and transactional advisors
  2. To be able to check your advisor’s work and disciplinary history
  3. Learn how to identify potential conflicts of interest when hiring an advisor

Advisors generally fall into one of two categories, but some may have characteristics of both.   The first category is advisors that act as a fiduciary.  Often these are referred to as “fee-only” advisors, meaning that their compensation is solely from the fees their clients pay.  A fiduciary is defined as:  A legal obligation of one party to act in the best interest of another. The obligated party is usually someone entrusted with the care of money or property.

Fiduciary advisors maintain an agreement with their clients that specifies the rate of compensation for the services being rendered.  The fees may be a flat rate, but more commonly are a percentage of the value of the assets being advised.  These advisors are normally registered investment advisors that are required by federal and state regulations to disclose all conflicts of interest to their clients up-front.  These advisors do not sell financial products for transaction or commission-based income.   

Transaction or commission-based advisors make money as financial products or securities are bought and sold by their clients.  They may also receive compensation in a fee-based manner as described above, but cannot refer to themselves as a fiduciary or fee-only due to the potential to earn commission based income.  There are more potential conflicts of interest in a transaction-based relationship, and unlike registered investment advisors, the commissioned broker does not have an obligation to disclose these conflicts up-front.

You can check the registrations of all financial advisors at: http://www.sec.gov/investor/brokers.htm   At this site you can see if your advisor has any disciplinary history and which firms they have been associated with during their career.

The best advisory compensation model for you will depend on the services you desire and the way you will work with your advisor.  If you are a do-it-yourselfer but value help selecting investments, then a relationship with a commission-based advisor could work well.   If you value a long-term on-going relationship with an advisor who will get to know and understand the details of your financial situation and your goals, then the fiduciary model may be better for you, knowing that the advisor is bound to place your interests before their own.

Charles Schwab & Company sponsors a great website with articles, videos and workbooks that can help you structure your search for the best investment advisor for your situation.  Visit www.findyourindependentadvisor.com to learn more.   You can also see a list of local independent advisors by searching with your zip code.

In summary, it is best to first select the advisor compensation model (transaction-based or fee-based) and then search for a firm or  individual advisor that you have trust in and the pricing structure that works for you.

 If you would like to learn more contact us today at (941) 778-1900 or Click Here to schedule a call.