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Fiduciary 101: What You Need to Know?

Mar 16, 2022 | Research, Transparency Articles

With many firms and thousands of investment products to choose from, it can be difficult to determine which securities will help you meet your financial goals. That’s where an experienced investment advisor can help. However, you should be careful when choosing your advisor because not all financial advisors provide the same services, and they are not all held to the same standards.

When you choose an advisor to manage your savings, trust is often a key component of that relationship. After all, your advisor can have a significant impact on your financial future, so it’s critical to choose one that is held to the highest standard of loyalty and care – a fiduciary.

What is a fiduciary?

A fiduciary is someone who holds a legal or ethical relationship of trust with one or more clients and is bound to take action in the clients’ best interests. A fiduciary duty is composed of two main principles: duty of care and duty of loyalty.

A Fiduciary’s Duty of Care

Under the duty of care provision, a fiduciary must make recommendations that are in the best interest of the client, seek the best execution of trades, and monitor client accounts over the course of the relationship.

Before a fiduciary can make recommendations, they must have a full understanding of their client’s finances including their current financial position, goals, and risk tolerance. With this information in mind, they will recommend products that they believe will provide the greatest benefit to the client. Additionally, a fiduciary must be knowledgeable about the products they offer and consider the cost of the investments they recommend compared to alternative investment options.

In a relationship where the fiduciary places trades for their clients, the fiduciary must ensure that the trades are placed to generate the most favorable outcomes for the client. This could include minimizing trading costs and ensuring that a client’s trade is fully and accurately executed.

Finally, when a fiduciary has an ongoing relationship with a client, he or she has an obligation to monitor the accounts under management and provide ongoing advice. This includes making sure that recommended account types and investments remain in the client’s best interest on an ongoing basis.

A Fiduciary’s Duty of Loyalty

Under the duty of loyalty, a fiduciary must put their client’s best interest before their own. This includes ensuring their clients have a clear understanding of the scope of advice being offered and any limitations to the advice that the fiduciary provides.

Additionally, a duty of loyalty includes eliminating conflicts of interest between the advisor and the client where possible. When conflicts cannot be eliminated, they must be clearly disclosed to the client.

Registered Investment Advisors [RIAs] are Fiduciaries

It may be surprising to learn that not all financial professionals are fiduciaries. In fact, representatives at broker dealers are generally not held to a fiduciary standard. These representatives are employees of the broker dealer and are compensated by trade commissions. This compensation structure can create a conflict of interest between products that are in the client’s best interest and those that generate the most profit for the broker dealer.

However, RIAs are held to fiduciary standards. They are legally and ethically bound to offer recommendations that are always in the best interest of the client. And, fee-only RIAs, like DreamWork Financial Group, are compensated based on assets under management, not trade commissions.

Benefits of Working with a Fiduciary

There are many benefits of working with an advisor who is a fiduciary. Besides having your best interests in mind throughout the advisory relationship, they can help maximize your investment returns and ensure you are on the right track to meeting your financial goals.

Fiduciaries Are Client Focused

The rising popularity of RIAs is being driven by a larger shift across industries toward a customer-first focus. Clients have come to expect more from the advisor-client relationship and semi-annual meetings aren’t going to cut it in the 24/7, on-demand world we live in.

Customers want an advisor who is accessible, trustworthy and driven to provide the best possible service and advice they can. So, RIAs are building their practices around those customers — giving them a distinct advantage over large brokerages and banks with standard processes that don’t adjust easily to the needs of individual clients.

Fee-Only RIAs are Compensated Based on AUM, Not Commissions

Broker dealers earn money when investors buy or sell certain products. The amount that the broker dealer earns can vary greatly depending on the product and product sponsor. This can create a conflict of interest between broker dealers seeking to maximize their own profits and investors who want to maximize their investment returns.

In contrast, fee-only RIAs are paid a percentage of assets under management [AUM] and do not earn any money from commissions. So, when a fee-only RIA recommends a particular investment, it is because that investment is in the best interest of the client, not because it generates more income for the advisor.

Because fee-only RIAs are paid based on assets under management, they make more money when their clients’ assets perform well. This means the client’s and the advisor’s incentives are aligned. Because of this dynamic, RIAs are incentivized to grow their clients’ assets as much as possible, without sacrificing safety, to increase their own compensation.

Fiduciaries Can Save You Money

In 2015, the Council of Economic Advisors determined that conflicted investment advice leads to lower investment returns of about 1% a year. This adds up to bad investment advice costing investors $17 billion a year, just in their IRA accounts. Conflicted investment advice stems from non-fiduciary advisors recommending products that benefit the advisor rather than the client. Working with a fee-only RIA fiduciary eliminates the risk of conflicted advice because fee-only RIAs are not allowed to earn commissions from trades.

How can I tell if my advisor has a fiduciary responsibility?

Most RIAs, like DreamWork Financial Group, note their RIA status clearly on their website. But you should also complete your own due diligence and ask the right questions.

Ask to see the advisor’s ADV (a form filed with the SEC). This form will tell you how your advisor is compensated and will also disclose any conflicts of interest that could impact the investment advice you receive. You can also review your advisory agreement to determine which services your advisor offers and how they are paid for their services.

DreamWork Financial Group, RIA, Your Trusted Fiduciary

As an investor, you need to know your money is in good hands. When you ask for financial advice, you need confidence that you’re getting what’s best for you, not your advisor.

At DreamWork, we take our responsibility as a fiduciary very seriously. When you work with us, you can rest assured that your investments were chosen with your specific goals, risk tolerance, and financial position in mind. Our exclusive system, Investing Gameplan™, takes your situation into account, and the result is a portfolio comprised of equities and ETFs that suit your risk tolerance – designed to meet your investing goals. To learn more about DreamWork Financial Group and our proprietary investing system, Investing Gameplan™, contact us today.