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What Is a Fiduciary and Why Should You Care?

What Does a Fiduciary Mean?

I mention quite a lot that I am a fee-only, fiduciary financial advisor for my clients. But what does “fiduciary” mean? When you get advice from a financial advisor, you might be receiving advice under either a suitability standard or a fiduciary standard. The suitability standard requires that the advice you get is “suitable” for you. The fiduciary standard, on the other hand, requires the advice to be in your best interest. 

An example might help illustrate this. Let’s say you and your advisor agree that a certain percent of your portfolio should be invested in an index mutual fund that replicates the S&P 500 index. Your advisor then goes back to his or her office and looks over the choices. The fees on the fund choices range from 0.05% per year to 0.65% per year with a 3% load*. They all are index funds and they all meet your goal of investing in a fund that replicates the S&P 500.   Any of these funds could thus be considered “suitable” for your goal. So your advisor, if held to the suitability standard, might recommend any one of these options to you.

However, only one may be in your best interest and the fiduciary standard requires the advisor to recommend, all else being equal, the lowest cost version.

How to Know If Your Advisor is a Fiduciary?

How do you know if your advisor or potential advisor is a fiduciary? Fortunately, it’s very simple.

  1. Ask them “Are you a fiduciary?”
  2. If they say “Yes,” ask them if they will put their promise to act as a fiduciary in writing and sign it. If they do not already have a pledge they use, here is a link to one Example oath.

If you get a “yes” and a signed document, you can be confident you are dealing with a fiduciary and that the advice you get will be more than just “suitable.” If you don’t, you might want to keep looking.

 

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*[The difference between the 0.05% version of the index fund and the 0.65%/3% load  version of the index fund on a  $100,000 investment, earning 7% average before costs, could mean a difference of as much as $50,000 over twenty years. Source: Vanguard Compare Costs calculator.

Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor.  Tel: (910) FEE-ONLY.   Synergy Financial Planning may offer investment advisory services in the State of Connecticut and in other jurisdictions where exempted.

Investing involves substantial risk and has the potential for partial or complete loss of funds invested. Investments mentioned may not be suitable for all investors. Before investing in any investment product, potential investors should consult their financial or tax advisor, accountant, or attorney with regard to their specific situation.