Editor's Note: This story originally appeared on NewRetirement.
If you are not exactly sure what fiduciary means, you are not alone. However, this concept is important for anyone who is seeking help with retirement, investments, savings, and all personal finance matters.
A fiduciary is an individual in whom another has placed the utmost trust and confidence to manage and protect property or money. Most importantly, as part of a fiduciary relationship, one person (the adviser) has an obligation to act for another’s (the client’s) benefit.
Here’s a look at how fiduciaries work.
The term fiduciary is derived from the Latin fiducia, which means “trust.” Any person acting as a fiduciary for you has a legal or moral obligation to put your needs and interests before any of their own needs or interests.
The word fiduciary is both a noun and an adjective.
When you employ a financial adviser who has a fiduciary duty or responsibility, that means that all of their decisions and recommendations are based on fulfilling your interests.
A fiduciary financial adviser will not sell you an investment because they get a big commission. Rather, they will only sell you investments that make sense for your financial goals. Furthermore, fiduciary financial advisers must disclose any potential conflicts of interest (like sales commissions).
According to Cornell Law School’s Legal Information Institute, “A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients.
A fiduciary duty is the strictest duty of care recognized by the U.S. legal system.”
Fiduciaries work for the benefit of the individuals they serve, and they are responsible for avoiding “self-dealing,” or conflicts of interests in which the potential benefit to them is at odds with what is best for the person who is paying for their services.
A trustee of a trust is a common type of fiduciary. However, fiduciaries can also include people — primarily stockbrokers and financial advisers — and companies, such as banks, title firms, and attorneys.
A financial planner with a fiduciary responsibility is obligated to provide advice and investment recommendations that are in the best interest of their clients.
Fiduciary advisers are usually fee-only advisers, meaning you pay for the services out of pocket (as opposed to a fee structure where the adviser earns money from commissions or through managing your assets).
When it comes to serving the best interests of their clients, some financial planners and investment advisers are subject, by law, to the legal standard of fiduciary duty.
This legal obligation originates from certain federal statutes, most notably the Investment Advisers Act of 1940, a section of which generally prohibits an adviser from engaging in any practice that is fraudulent, deceptive, or manipulative.
Investment advisers typically carry Series 65 or Series 66 licenses, which are competency examinations administered by the Financial Industry Regulatory Authority (FINRA) on behalf of the North American Securities Administrators Association.
These licenses are required for anyone who intends to provide any kind of financial advice or service on a non-commission basis. Financial planners and advisers that provide investment advice for an hourly fee also fall into this category.
The exams focus on key topic areas that are important for an adviser to know when providing investment advice, including retirement planning, portfolio management strategies, and their fiduciary obligations.
One particular area of the examination requires prospective advisers to know important laws, regulations, and guidelines, including a prohibition on unethical business practices.
And fiduciaries are usually Certified Financial Planners.
Fiduciary responsibility is vitally important when entrusting a financial planner to manage your assets. This becomes especially important as you near retirement age.
After all, it’s your wealth that’s at hand. It’s important to find the right person or institution who will preside over your assets in a way that’s in your best interests because it’s literally essential to the security of your retirement.
To ensure your finances are in the right hands, don’t be afraid to ask advisers some key questions. For example, you might ask them if they are a fiduciary full-time — some may only be fiduciaries part-time — what their licensing background is, what types of clients they generally work with, and how they work with them.
Asking advisers about their fee structures and how they are compensated should also be considered, too. Fee-based advisers might charge a combination of a flat fee plus a commission, whereas commission-based advisers might have a conflict of interest since they are paid based on the products they sell you.
“If the adviser is paid based on commission, ask how he or she manages and discloses this conflict with you,” says Judy McNary of Broomfield, Colorado-based McNary Financial Planning, LLC. “If you are not comfortable with the answer, seek a different adviser. After all, it’s your money!”
NewRetirement offers fee-only advice from a fiduciary Certified Financial Planner, made cost-effective through collaborative use of the NewRetirement Planning tool.
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