Are they working in your best interest?
Let’s face it: finances can be complicated. Whether opening a new investment account, saving for your child’s college fund or rolling over a 401(k), sometimes you need professional financial help.
But who do you turn to? A financial advisor can be a great resource for professional guidance so that you’re not making critical investment decisions on your own, but did you know that not all financial advisors are equal? Some financial advisors may be little more than salespeople trying to sell you investment products that may or may not be in your best interest, but earn them a hefty commission.
If you’re looking for an advisor who truly has your back, you need to work with what is called a “fiduciary.” As a fiduciary, your advisor is legally required to place your interests ahead of their own.
It can be difficult to know who to trust – especially when advisors misrepresent their services with carefully crafted wording that gives the appearance of being a fiduciary, even when they are not. According to a recent survey from Financial Engines, America’s largest independent investment advisors, 53 percent of Americans mistakenly believe that financial advisors are already legally required to put their clients’ best interest first. Only 50 percent of investors who work with a financial advisor are certain that their advisor is a fiduciary, while 38 percent don’t know if their advisor is a fiduciary or not.
Most investors aren’t aware of how their advisors get paid and that advisors may not always be acting in their client’s sole best interest. For example, some advisors may recommend clients invest in funds or services that provide the advisor with a commission. Sometimes doing so is mutually beneficial for both the investor and the advisor. But other times, the investor may end up with higher or unnecessary fees and it’s the advisor who comes out on top.
So how can you tell if a potential or current advisor is a fiduciary? Here are a few key questions to ask before making a decision to work with them:
1. Are you a fiduciary?
A direct question deserves a direct answer. Pay attention to how the advisor responds. If your advisor has told you that he or she is acting as a fiduciary, ask them to show that to you in writing.
2. Do you receive any type of compensation in addition to what I’m paying you?
Some advisors receive commissions or other product-based compensation when they steer clients into particular investment products (including mutual funds, annuities and variable annuities). This is a clear conflict of interest and can indicate that the advisor is not, in fact, a fiduciary. Make sure your advisor is providing unbiased advice and not simply selling you investment products.
3. Are you “dual-registered”?
Some advisors are registered as both investment advisors and broker-dealers. Often, a broker-dealer is acting in the role of a salesperson. If your advisor is also a broker-dealer, make sure you understand which hat they are wearing when providing advice to you.
4. Have you ever been cited by a professional or regulatory body for disciplinary reasons?
To be extra sure, you can look up the advisor’s records on FINRA’s BrokerCheck to find out if they have any complaints – especially complaints related to providing financial and advisory services.
As your finances become more complex, you may consider getting help from a financial professional. Make sure your advisor is required to act in your best interest as a fiduciary before you trust them with your hard-earned money. By asking the right questions, you can confidently navigate the process and choose an advisor who is right for you.