Financial Advisors and the Fiduciary Responsibility

Senior Finance Advisor
Jul 9 · 7 min read

Updated on May 21 2019

There are many questions surrounding fiduciary financial advisors, from what they are to why they are the recommended financial advisors in today’s financial marketplace. Entrepreneur, financial expert and humanitarian Paul Merriman sheds light on why fiduciary financial advisors are so important.

Paul Merriman provides sound investing for every stage of life. He has worked in the financial space for over 50 years and his sage advice and dedication to educate the aging population is helping many seniors. In this interview, he discusses the importance of fiduciary financial advisors and why they are a good choice when shopping for a financial advisor.

Trusting Your Money With a Stranger: Why Fiduciary Financial Advisors Are Important

Merriman became semi-retired at age 40 and has been busy educating the public about the importance of financial planning and retirement preparation ever since. He discusses why financial advisors with a fiduciary responsibility are a good choice when looking for an expert to trust:

“The reality is that many in the industry try to keep the investor in the dark and the fiduciary is supposed to bring the light. But, even the fiduciary is nervous that if they tell you too much, you might decide to take care of your finances on your own. I am convinced a competent advisor who is legally and ethically required to put your interests ahead of their own, will expose you to less risk and will help you get a higher rate of return. If that’s true, finding an advisor who acts as a fiduciary should be a priority.”

Finding someone to trust with your money is hard as this person will have access to private details of your life, including your bank accounts, and can have a huge influence on your future retirement. Merriman notes that whoever you are going to trust with your money, they need to be focused on ways to either make you more money without taking more risk, or make a similar return as you are making at the present time at lower risk. Otherwise, you end up having to retire later and may lose your legacy to leave to family, friends and causes.

Doing your homework and finding a good fiduciary financial advisor is a good place to start. Brokers are not fiduciaries, so that’s a distinction. If you work with a broker, make sure you understand the fine print, their compensation and whether they have any conflicts of interest.

What Percentage of Financial Advisor Are Fiduciaries? Is the Designation Becoming More Common?

The ‘Fiduciary Rule, Duty and Obligation,’ which forever changed finance, ensures that advisors and their firms provide their clients the same advice and expertise they would practice themselves. More advisors are getting the fiduciary distinction as the Fiduciary Rule has put an important standard on the map for everyday investors, and technology and the prevalence of the fiduciary model are beginning to bring more transparency to the industry. The industry is still in the beginning stages of the education, though.

Merriman points out that finding a fiduciary can be tricky as fiduciaries comprise a small percentage of the advisor population and some are dually licensed. He says:

“There are over 13,000 registered investment advisory firms. Many advisors are dually registered as registered investment advisors and brokers, and you have to be careful as those people may be more inclined to sell products that are more profitable to them. There are over twenty five legitimate investment risks, but I think the biggest risk of all is trusting the wrong advisor. Finding a financial expert you can trust is huge. Make it a priority to do your research and find someone who is competent and ethical and truly has the unbiased perspective and fiduciary distinction.”

As the financial industry continues to evolve, the hope is that the fiduciary model will become more of the norm, which will force the financial services sector to move from a profit-centric model to a customer-centric model.

How Do You Choose a Good Fiduciary Financial Advisor?

Merriman notes that the process of investing successfully has never been easier, but using an advisor is still important for most investors. He says finding a professional recommendation is generally a smart move, and that a Certified Public Accountant (CPA) or a Personal Financial Specialist (PFS) is generally a good referral source as they see the returns their clients get and understand the tax side of investing. He discusses:

“Do business with an investment advisory firm that doesn’t take commissions. A good size is a thirty- to fifty-person firm who can afford to have a full-time compliance officer and the other support people who take care of a lot more than giving investment advice. I would only consider a firm that uses index funds. I think it’s important that the advisor and the firm be acceptable to both members of a couple. Men statistically die sooner, so you both need to get involved. It’s also important that the advisor is committed to educating both the husband and the wife. It’s easy to support the investor who likes the process, but the investor who doesn’t know much needs to be educated, as well.”

As investors, it’s important to do your research and take the time to understand how investing works so you can protect yourself. A fiduciary advisor can provide valuable insights and an unbiased perspective to help you prepare for your last third of life. While you are researching advisors, simply ask whether the potential advisor and their firm adhere to the “fiduciary duty.” Since some firms have advisors that can act as a fiduciary or non-fiduciary, it will protect you if you ask for their commitment, in writing, to only act as a fiduciary and that they will not receive a commission on any product they recommend. Choosing a fiduciary financial or investment advisor is an important step to make sure the advisor is someone who is obligated to act solely in your own best interest.

If you pay less in fees and expenses, you’re likely to make more. Merriman says the suitability requirement of a non-fiduciary only requires the advisor believe that a recommendation of a security or an investment strategy is suitable for a particular customer based on that customer’s investment profile. Unfortunately, the recommended security could have high expenses, low diversification, high turnover and low tax efficiency. In other words, the recommendation could lead to significantly lower returns and still be “suitable.” Merriman comments, “It’s an outrage, but that’s the way it works.”

It’s important to keep in mind that a good financial advisor should make sure you understand the fine print and why a specific investment makes sense for your unique needs.

What Percentage is Typical to Pay a Fiduciary Financial Advisor? What is the Average Fee?

One of the big questions people ask when looking for a fiduciary financial advisor is, ‘ how much does a financial advisor cost and is it worth it to hire a professional?’ Many people opt to do their personal finances themselves, but the investment of hiring an expert often pays for itself as a financial professional is able to navigate the financial marketplace and choose investments and portfolios that produce strong returns.

There are different compensation models, such as a percentage of assets under management (AUM), hourly rates, commissions and different fee types. According to Merriman, a quarter of one percent to one percent is typical, but there are a lot of people who charge hourly only or only a percentage of money under management.

The key is that you understand what you’ll be charged for the services you’ll be receiving from the financial advisor. Remember to ask the potential advisor for a clear explanation of how he or she will be compensated and choose some who provides an honest and straightforward answer.

Find a Fiduciary Financial Advisor Who Is Right for You

To choose a financial advisor that can set you up for financial success, you’ll want to choose one who truly understands the investment process, understands you and is committed to acting in your best interest. He adds:

“Just because someone is a fiduciary doesn’t mean they are offering advice that is in the best interest of clients. People have different belief systems. Some believe in active management over passive, higher expenses over lower, higher turnover over less turnover, and market timing over buy and hold. They may be willing to take more risk than seems appropriate for you. You have to find someone who resonates with your beliefs.”

Make an effort to get educated today. Read Merriman’s books, listen to his podcasts, and find a professional financial advisor who can help you prepare for your future.

About Paul Merriman

Paul Merriman is a nationally recognized authority on mutual funds, index investing, asset allocation and both buy-and-hold and active management strategies. Now retired from Merriman, the Seattle-based investment advisory firm he founded in 1983, he is dedicated to educating investors, young and old, through weekly articles at Marketwatch.com, and via free eBooks, podcasts, articles, recommendations for mutual funds, ETFs, 401(k) plans and more, at his website.

Originally published at https://www.seniorfinanceadvisor.com.

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