What it means to be a fiduciary advisor has a long and convoluted history. In fact, the original “fiduciary rule” was introduced by the U.S. Department of Labor around the same time consumers first became enamored with the Pet Rock back in 1975. Selling in non-fungible token form for up to $200,000, “pet rocks” have been associated with overzealous markets, the type of conditions a fiduciary advisor might advise caution in.
The DOL’s intentions behind the fiduciary rule were to protect retirement investors from conflicts of interest and to require individuals who oversee retirement plans, like plan sponsors and financial advisors, to act in retirement investors’ best interest. And while the fiduciary rule has endured legislative debates and attempted revisions over the past five decades (most notably in 2010, 2016 and 2020), these guiding principles have stood the test of time like the sarsen stones at Stonehenge.
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The origin of the word “fiduciary” also has a rich history. In early Roman history, when someone needed a rock-solid pledge on transferred property, a “fiducia” was created to bind the contract. “Fiducia,” derived from the root word “fidere,” is Latin for “trust,” so the very nature of a fiduciary conveys a sense of good faith, reliance and confidence. Here’s what you need to know about how fiduciary advisors are meant to convey those principles in relationships with clients:
— What is a fiduciary advisor?
— How much do Americans trust their financial advisors?
— What do clients want from a financial advisor?
— What separates a fiduciary advisor from other financial planners?
What Is a Fiduciary Advisor?
The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to act in their clients’ best interest. This fiduciary duty is regulated by the Securities and Exchange Commission and is characterized by two key applications (summarized):
— Duty of care. The investment advisor must, among other things, understand clients’ financial objectives and circumstances, and apply skill, diligence and prudence in support of their needs and objectives.
— Loyalty. The investment advisor must avoid any conflicts of interest and always prioritize clients’ best interests.
How can someone verify whether a financial professional is indeed a fiduciary advisor? One way is to simply ask the financial professional. Another method is to check the SEC website or look into the financial professional’s credentials; a certified financial planner (CFP) professional, for example, is obligated to act as a fiduciary advisor.
There are currently more than 101,000 CFP professionals registered with the CFP Board. The CFP Board advocates for consumers’ financial interests and offers tips on how to select a financial advisor.
CFP Board CEO Kevin R. Keller says: “CFP certification represents rigorous training, knowledge and skills that have been tested in a high-stakes exam. Perhaps most importantly, it represents that the advisor has committed to (the) CFP Board that they will act as a fiduciary — that is, to act in the best interests of their client at all times when providing financial advice. That fiduciary commitment is the first thing consumers should look for when selecting a financial advisor.”
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How Much Do Americans Trust Their Financial Advisors?
American consumers place a great deal of trust in the financial professionals who support their ongoing investment and financial planning needs. In fact, according to Northwestern Mutual’s 2024 Planning & Progress Study, “financial advisors are Americans’ most trusted source for financial advice — twice as trusted as family members and eight times more trusted than ‘FinTok’ social media influencers.”
Northwestern’s study also uncovered significant differences in attitudes among Americans who actively engage a financial advisor relative to those who currently do not. For example, 3 in 4 Americans with an advisor feel confident in their financial strategies for retirement, compared with just 45% of those without an advisor. Nearly 7 in 10 of those with an advisor have planned for inflation, compared with only 48% without an advisor. And 69% of Americans with a financial advisor feel confident in their plan for health care costs in retirement, compared to 38% of those without an advisor. They also feel better about the steps they’ve taken to prevent outliving their savings (83% compared to 53%).
Still, there are different types of credentialed financial professionals who work closely with consumers, such as a CFP professional, accredited investment fiduciary, certified public accountant (CPA), accredited wealth management advisor or financial risk manager.
While many financial professionals are referred to as “wealth advisors” or “financial planners,” not all of them technically function in a fiduciary capacity.
Beyond the context of a title or credential, a registered investment advisor is an investment firm or person who has formally registered within their state or with the SEC to manage investments on behalf of their clients and deliver services as a fiduciary advisor.
What Do Clients Want From a Financial Advisor?
When clients engage a financial advisor, they have certain expectations about the nature of that relationship. Ryan Murphy, Samantha Lamas and Ray Sin explore clients’ expectations in a Journal of Financial Planning article titled “Identifying What Investors Value in a Financial Adviser: Uncovering Opportunities and Pitfalls.” From their research, they list the top qualities clients value the most in their relationship with a financial advisor:
1. Helps me reach my financial goals.
2. Has the relevant skills and knowledge.
3. Communicates and explains financial concepts well.
4. Can help me maximize my returns.
5. Has a good reputation and positive reviews.
What’s striking is how much clients value a collaborative, dynamic relationship with their financial advisor and appreciate conversations with a purpose, beyond just a checkup on their investments.
It’s akin to the value frequent travelers get from a dependable tour guide, suggests Wendy Rogers, chief family officer for the Gleneagles Group, based in Atlanta. Rogers says fiduciary advisors “function like a tour guide and are really interested in your experience and your journey for many decades.” She adds that fiduciary advisors are typically “focused on listening to their clients about family goals.”
What Separates a Fiduciary Advisor From Other Financial Planners?
Many financial planners of varying stripes have good intentions and want to deliver a remarkable experience for their clients. Fiduciary advisors are not unique in that regard. There is a distinction, however, in that fiduciary advisors embrace a formal, legal process to always pursue clients’ best interests, and to invest time and energy in the financial objectives that matter most to their clients. After all, there’s an implied promise at stake when consumers reach out to financial advisors for help.
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What Is a Fiduciary Advisor? originally appeared on usnews.com
