The definition of a fiduciary is a person or organization that has the power and responsibility of acting for another in situations requiring total trust, good faith and honesty. A financial advisor who has fiduciary responsibility owes their clients more than honesty and good faith alone; they must act solely in the best interest of the clients, and to make full and fair disclosure of all material facts, especially if any conflicts of interest exist. Fiduciary advisors are responsible for carrying out their duties prudently and to put the clients’ interest above their own. In short, fiduciary advisors are held to a higher standard than non-fiduciary advisors.
A Registered Investment Advisor (RIA), such as AlphaMark Advisors, who does have a fiduciary responsibility to their clients is regulated under the Investment Advisor Act of 1940 and is overseen by the US Securities and Exchange Commission (SEC).
Some, but not all, financial advisors are fiduciaries. According to a US News report, nearly half of Americans falsely believe all advisors are legally required to always act in their clients’ best interest. Not only is this inaccurate, it can also be harmful to those investors who put their trust in an advisor who may put their own interest before investors.
If an advisor does not have a duty to act as a fiduciary, they may be swayed into selling securities to clients that are not suitable for a client’s specific needs based on their age, risk tolerance, and future cash needs in order to receive more compensation generated by high commission, 12B1 fees from funds, opening certain types of accounts or selling annuity products. Some of these compensations can be exorbitant, especially in the case of annuities, which can pay agents from 1% to 8% depending on the policy term.
On the other hand, most fiduciary advisors are “fee only,” where the investor pays a management fee to the advisor based on a mutually agreed upon percentage of assets under management. With an advisor who has fiduciary responsibility, the client usually gives discretionary authority over their account assets. This is done so that the advisor can trade in their account freely on their behalf without needing express consent before each trade in order to not delay the investment process.
So, how does this difference in compensation affect an advisor who is a fiduciary? A fiduciary advisor may recommend a product, investment, or particular account that results in reduced or even no compensation because it is the best option (in the best interest) for the client. It is imperative that all clients understand the management of their portfolio and everything is transparent from the fees charged, to investments purchased and allocation held in the portfolio.
If you are unsure if your financial advisor is a fiduciary or not…ask!