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What Is Fiduciary Wealth Management (& How Will It Benefit You)?

Posted by Jim Kantowski, CFP®, CPA on July 16, 2020

What Is Fiduciary Wealth Management (& How Will It Benefit You)?

Trusting someone to manage your money is a big decision. You need to know that your wealth is in good hands, and that whoever you choose to look after it is not only knowledgeable in their field, but will act with your best interests in mind. That’s why it’s important to understand the concept of fiduciary wealth management before you seek out a financial advisor.

Fiduciary wealth management means that the person or institution—for example, a bank—managing your money is legally required to act in your best interest. A fiduciary must put your needs at the forefront of the process when they create your financial plan and offer you advice, as opposed to leading you in a direction simply because it’ll result in a sale. (Tweet this!) In this article, we’ll cover what a licensed fiduciary is, and we’ll explore their duties to you as a client, as well as how you can choose the right wealth management firm for your needs.

What is a licensed fiduciary?

It’s important to look for a financial advisor with a Certified Financial Planner (CFP) designation. This means that they’re a licensed professional with a fiduciary duty; they’ve gone through up to two years of study to obtain their license; and they’ve passed a rigorous exam that carries a 50% failure rate. CFPs must also have experience working in the financial industry, and are required to adhere to robust ethical standards to maintain their designation.

You can choose to work with an independent fiduciary or a larger fiduciary practice. The former simply means that the firm isn’t part of one of the big American banks such as JPMorgan Chase or Wells Fargo.

What are fiduciary duties?

Ultimately, fiduciary wealth management duties come down to your advisor doing what’s right for you—the client. Fiduciaries must avoid conflicts of interest, or disclose them in the event that they do occur. Fiduciary financial advisors have to make an effort to clearly understand your financial goals and translate that information into a wealth management plan tailored to meet your needs.

A fiduciary’s duty to you is to be trustworthy, reliable, and knowledgeable in their field. They must disclose any information about financial products or services that would be pertinent for you to know about, so that you can decide whether a particular solution is right for you.

For example, if you asked your financial advisor to purchase a certain type of investment and they bought something else that earned them a large commission, that would be a violation of their fiduciary duty. Alternatively, if your money was in a retirement account with low fees at another firm and you inquired about changing representation, a fiduciary would have to be honest about whether that would be the right decision for you rather than trying to convince you to move your money to their company so they can earn a fee or commission.

Fiduciaries understand that, while a financial product may not be sub-par by nature, it may simply not be right for a particular client’s personal situation. For example, if a client had $1 million to invest and wanted to buy an annuity (an insurance contract that pays you income regularly), a fiduciary would be obligated to point out the risks, high fees, and commissions associated with that and tell the client that putting all of their eggs in one basket may not be their best option.

Nonetheless, the type of advice you may receive from one financial advisor to another can vary, as some take a more aggressive approach to investing, use different products, and have different strategies than others. It’s important to clearly communicate your needs—and your risk tolerance level—to ensure that the fiduciary advisory services you’re being offered are a good fit.

How Fiduciaries Are Held Accountable

Fiduciaries with CFP designations can have their license revoked if they don’t adhere to the CFP Board's Code of Ethics and Standards of Conduct. Breaches can include placing trades without your consent, or misrepresenting their services—for example, not telling you upfront about charges you’d have to pay to get out of an annuity.

Code of Ethics

A CFP professional must:

  1. Act with honesty, integrity, competence, and diligence.
  2. Act in the client's best interests.
  3. Exercise due care.
  4. Avoid or disclose and manage conflicts of interest.
  5. Maintain the confidentiality and protect the privacy of client information.
  6. Act in a manner that reflects positively on the financial planning profession and CFP certification.

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In addition, the Securities and Exchange Commission (SEC) binds investment advisers to fiduciary standards that are quite comprehensive and include anti-fraud provisions, disclosure obligations, referral fee restrictions, and a duty to execute transactions that will be cost-effective for you. Investment advisers who are registered with the SEC must report their eligibility on an annual basis, which includes submitting paperwork to the commission to retain their registration.

How To Choose The Right Fiduciary Wealth Management Firm

Not all financial advisors, stockbrokers, or insurance agents are fiduciaries, so it’s important to do your homework when you’re looking for someone to manage your money. Choosing a professional with a fiduciary designation can give you peace of mind with the knowledge that they are legally obligated to act in your best interest. As you’re searching for an advisor, ask the following questions:

  • How are you compensated? Fiduciaries can operate under a commission-based structure or a fee-only approach. In the former scenario, they have to take commissions out of the equation when they’re offering you advice, which can be hard to do. Alternatively, fee-only advisors’ compensation comes solely from you as part of their asset under management fee or hourly rate. They do not receive any commission for selling products.
  • Are you licensed with the CFP, and do you carry a Certified Public Accountant (CPA) designation? If the answer is yes to both questions, this reinforces their credibility. The CPA world highly values independence, and is staunchly opposed to engaging in conflicts of interest.
  • What is your investment philosophy? For example, some advisors favor individual stocks while others don’t, and some opt for lower cost investments like exchange traded funds and mutual funds, while others choose higher cost investments. You need to have a clear understanding of your advisor’s approach to investing, so you can make sure it’s a good match for you and that it’s consistent with your goals.
  • How often will you communicate with me, and what services will I have access to through your firm? You need details around the relationship with your financial advisor so that you can be confident their service will meet your expectations. For example, can you call them for anything finance related? Are they interested in discussing financial planning opportunities that may arise in your life or only focused on managing your investments?

It’s essential to have a proper agreement in place when purchasing fiduciary advisory services, and to be aware of any restrictions and costs associated with terminating relationships. Having an Investment Advisory Agreement and an Investment Policy Statement is a good practice to protect your interests.

The Bay Point Wealth Approach

As a fee-only firm, when you approach us for a financial plan, investment solution, or tax assistance, we keep the sales process out of the conversation—even if that means our engagement ends after a conversation or an initial financial plan. There is no cost for an initial conversation and no commitment to us going forward on your part. We want to be flexible to meet your needs.

We also pride ourselves on being approachable and offering educational information, while not getting “into the weeds” with financial jargon. If you ask us about changing your portfolio, we’ll review your current situation and present the pros and cons of making adjustments, helping you think through the implications. The final decision is completely up to you.

As a client, you can even choose to terminate your contract at no cost. You won’t have to make any changes to your accounts because all accounts are held at an independent custodian in your name. At Bay Point Wealth, we focus on putting your interests first, not ours.

If you’re looking for a fiduciary wealth management partner who will strive to understand your goals, schedule a call today to learn more about Bay Point Wealth’s advisory services.

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Topics: Investment News, Wealth Management