The financial services industry can be confusing. There's a lot of jargon, and often financial terms are interchanged when they should not be. This is especially true with the terms "fiduciary" and "suitability." While they sound similar, they're very different and it's important to understand how.
What Is a Fiduciary?
A fiduciary is someone who is entrusted with the responsibility of managing another person's money. This means that a fiduciary is obligated to act in your best interests and must put your needs above their own.
The relationship between a financial advisor and his or her clients can be compared to other relationships where people place confidence in one another, such as doctors and patients, attorneys and clients, therapists and patients (think "shrink"). In these relationships, there are legal protections ensuring that those charged with providing services do so competently and honestly.
The law requires them at all times to act solely in the best interests of their clients; they cannot use confidential information for personal gain or self-interest; they must maintain professional standards of care higher than other professions; they must keep client records confidential; they cannot accept gifts from clients except as appropriate compensation (i.e., gift cards for Christmas).
Financial advisors are held to this higher standard because we work with people's life savings—their hard-earned money that represents years spent working hard at school or on the job—and we have access at any time through various means (phone calls) which allows us access into their house if needed! This is why advisors are licensed by states before they can practice their profession legally within that jurisdiction - which means if you go see them then there will probably be some sort of background check done beforehand!
Who is a fiduciary and what do they do?
A fiduciary is someone who is working on behalf of another person, or for the benefit of another person. This can include an attorney, doctor, or accountant. In some cases, it may also include a family member who has authority over your finances or property.
A fiduciary duty is a legal responsibility that requires one party to act in the best interests of another party (the beneficiary). For example, trustees are bound by fiduciary duty to act in the best interests of beneficiaries; attorneys have a fiduciary duty for clients, and doctors have a fiduciary duty for patients.
How do I know if I'm working with a fiduciary financial advisor?
If you’re looking for a financial advisor, ask them if they are a fiduciary. If they aren't, there's no harm in asking more questions to figure out how they work—and why (or why not).
Ask them if they belong to any professional organizations that require their members to follow certain ethical guidelines. For example, NAPFA (National Association of Personal Financial Advisors) requires its members to adhere to a code of ethics and charge fees that are “reasonable” under the circumstances—both of which help ensure that clients receive unbiased advice from those who have their best interests at heart.
Some advisors might also belong to Financial Planning Association or the CFP Board; these organizations require all of their members to meet specific educational standards and continuing education requirements in order for them to maintain membership status with these entities so again it would be wise for consumers seeking out financial advice from other professionals such as accountants or attorneys as well because these individuals may not have gone through extensive training on providing investment-related services yet still need your trust when it comes time to help you choose financial products and services.
Is a robo-advisor a fiduciary?
Well, that's the question we're here to answer.
But first, a brief history lesson: In 1940, Congress passed the Investment Advisers Act of 1940 (also known as the "1940 Act"), which required investment advisers to register with the SEC and follow certain rules.
Over time, these regulations have been updated by several different acts including the Small Business Investment Act of 1958 (SBICA), which gives small businesses access to private equity funding; The Employee Retirement Income Security Act (ERISA) covers pension plans, and The Bank Holding Company Activities Act regulates bank holding companies.
All of these laws are meant to protect investors from fraud but none actually require financial advisors or brokers who provide advice about investments or retirement plans to act in your best interest.
They might tell you what investments they think are best for you in order for them to make money off of your commissions but it doesn't mean their advice is always in your best interest or even accurate!
Fiduciary duty vs. suitability standard
You may have heard that a fiduciary duty is a legal obligation to act in the best interest of a client. You'd be right!
But you might not know that there's another standard called "suitability," which is a legal obligation to recommend investments that are suitable for a client.
While these two standards both require financial advisors to act in their clients' best interests, suitability is considered the lesser of the two. In other words, if it were up to us (and we're only speaking hypothetically here), we would much rather be held by our fiduciary duty than by suitability standards alone.
That being said, at Wealthfront we've never had any problems with complying with either standard: We always provide our clients with products and services they need while also making sure they're receiving them at fair prices and high-quality levels.
What’s the difference between a fiduciary and a financial advisor?
A financial advisor has a client, and that client trusts the advisor to give them advice. That advice can be about anything from managing their money to investing in a particular stock or bond. A fiduciary is someone who has a legal obligation to act in the best interests of their client.
So, what's the difference between a fiduciary and a financial advisor? Well, they both give financial advice, but only one of them has an actual legal responsibility to act in your best interests. If you're starting out on your own and want some help making sense of it all, it might make sense for you to work with both types of professionals.
A fiduciary will work with you to build your investment portfolio or retirement plan. They'll help you figure out how much money you need now and how much you want to save for later on down the road—and they'll also help guide you through any legal obligations that come along with those decisions.
A financial advisor can also help you make these decisions, but there's no guarantee that they're doing so because it's what's best for you—they could just be trying to sell you something or earn more commissions from their employer (which might not even be good for your wallet).
How much does a fiduciary financial advisor cost?
The cost of a fiduciary financial advisor depends on your needs and goals. A fiduciary financial advisor can help you plan for retirement, college education, and other major financial decisions, and will work with you to develop a strategy that is tailored to your unique situation.
The average cost of a fiduciary financial advisor is $2,000 per year, but costs can range from $2,000 to $7,500 per year.
Conclusion
Before you even start your job search, make sure you know the duty and responsibility of a fiduciary. The role is not easy and it can be stressful at times.
But if done right, it will put you in good stead for the future. It's also important to understand that no matter what type of business (or person) you work for, being a fiduciary means putting their needs above all else—including yours.
While this may sound like an impossible task, there are ways around it: For example, instead of making decisions based solely on your own interests as an employee or employer, consider taking into account what others will benefit from them too!
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