Is your financial adviser a fiduciary you can trust?
By Brent Lindell
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There are few people in your life you can trust with your most confidential information, especially your finances. And in today's uncertain financial world of investment scams and corporate scandals (does Madoff ring a bell?), it may seem like there's no one out there you can trust to handle your money.
The truth is, financial advisers should also act as fiduciaries. In other words, they have a legal responsibility to handle your money with the utmost ethical standards.
Fiduciary responsibility is a core value the best financial institutions instill in their advising approach. It is defined as:
1) A person who is required to act for the benefit of another person on all matters within the scope of their relationship; one who owes to another the duties of good faith, trust, confidence and candor.
2) One who must exercise a high standard of care in managing another's money or property.
Fiduciary responsibility is a relatively new term, and sometimes difficult to define. Its necessity arose from the collapse of firms like Enron and WorldCom, after brokers were tried and convicted for unethical trading practices. An agreement was reached and substantial fines were paid by large firms. Sadly, investors continue to be misled by the influence and past reputation of some of these firms. In fact, many firms who have
agreed to pay large fines may now be attempting to salvage their reputations and reform their ways only in reaction to "being caught" and "being forced" by regulatory authorities to reimburse injured investors. This makes it difficult for investors to know how genuine the "reform" is or how long it will last.
So how do you protect yourself and your finances? It is vital that individuals research their potential advising firms to see if they hold true to these fiduciary core values. Here are some things to look for.
1) First, check to see if your financial adviser is a Registered Investment Advisor (RIA). RIAs managing more than $25 million are regulated by the Securities and Exchange Commission, and those who manage under $25 million are regulated at the state level. This ensures your money is handled in your best interest and with the utmost ethical practices.
2) Be skeptical of fiduciary inferences from long-established firms whose compensation models have resulted in biased recommendations. You should also be wary of any adviser who is unwilling to clarify his or her fiduciary status, or who displays a reluctance to disclose how their processes fulfill their fiduciary responsibility. And, why wouldn't an investment provider's interests be aligned with yours? Almost every case of conflict is based on compensation.
3) In reaction to the breaches of trust, organizations such as NAPFA (National Association of Personal Financial Advisors), the FPA (Financial Planning Association), and the Center for Fiduciary Studies now provide standards that can help you select an adviser to serve you as a fiduciary. Following these guidelines will allow you to distinguish between true fiduciary advisers and salespeople posing as fiduciaries.
Following these guidelines can assist you with making the decision on whom to trust with your hard-earned dollars. Finding a fiduciary who will strive to grow your investments and secure your financial future can be done with a little research.n
