Fiduciary 101: What You Need to Know?

by | Jun 12, 2023 | Brand Features, Research, Transparency Articles

There are thousands of investment products on the market. With so many choices, you may have difficulty finding securities that will help you reach your financial goals. That’s where an experienced financial professional can help.

Your advisor can have a significant impact on your financial future, so they should be someone you trust. That’s why it’s critical to choose a wealth management firm 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 act in the clients’ best interests. A fiduciary duty is composed of two main principles: duty of care and duty of loyalty.

Definition of a fiduciary with a watermark of the DreamWork Financial logo – Someone who holds a legal or ethical relationship of trust with one or more clients and is bound to act in the clients’ best interests.

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. Additionally, a fiduciary must 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. This includes their current financial position, goals, and risk tolerance. With this information in mind, a fiduciary advisor will recommend products they believe will provide the greatest benefit to the client. Additionally, a fiduciary must be knowledgeable about the products they offer and consider the relative cost of the investments they recommend.

In a relationship where the fiduciary places trades for their clients, they must ensure the trades are placed to generate the most favorable outcomes for the client. This includes minimizing trading costs as well as ensuring that trades are fully and accurately executed.

When a fiduciary has an ongoing relationship with a client, they have 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 clients have a clear understanding of the scope of advice being offered and any limitations to the advice provided.

Additionally, a duty of loyalty includes eliminating conflicts of interest between the advisor and the client where possible. When they cannot be eliminated, conflicts of interest 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, advisors at Registered Investment Advisory Firms [RIAs] are held to a fiduciary standard. RIAs are legally and ethically bound to offer recommendations that are always in the best interest of the client. Further, fee-only RIAs are compensated based on assets under management [AUM], rather than trade commissions.

Benefits of Working with a Fiduciary

There are many benefits of working with a fiduciary advisor. They are legally bound to have your best interests in mind, can help maximize investment returns, and can work to 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 enough in today’s 24 / 7, on-demand world.

Customers want an advisor who is accessible, trustworthy, and driven to provide the best possible service, and RIAs are building their practices around those customers. RIAs have 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 structure can create a conflict of interest between broker-dealers seeking to maximize their profits and investors who want to maximize their investment returns.

In contrast, fee-only RIAs are paid a percentage of AUM and do not earn any money from commissions. 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.

Since fee-only RIAs are paid based on AUM, they make more money when their clients’ assets perform well. This means the client’s and the advisor’s incentives are aligned.

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 bad advice costs investors $17 billion a year, just in their IRA accounts. Conflicted investment advice stems from non-fiduciary advisors recommending products that benefit themselves 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 note their RIA status clearly on their website. However, 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 should have confidence that you’re getting what’s best for you – not your advisor. At DreamWork Financial Group, 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 unique investing system, Investing Gameplan™, takes your situation into account to design a portfolio comprised of equities and ETFs that suits your risk tolerance and works to meet your investing goals. Best of all, Investing Gameplan™ is open to investors of any net worth. We believe that the size of your account should not determine the quality of advice you receive. With DreamWork, You Don’t Have to Be Wealthy to Have Wealth Management®.

To learn more about DreamWork Financial Group and our proprietary investing system, Investing Gameplan™, contact us today.