What is a fiduciary financial advisor? The word fiduciary is a great word to hear if you are looking for a financial advisor who will help you achieve your retirement goals. A fiduciary is an advisor who advises his or her client according to what is in the best interest of the client. An advisor who takes this role is expected to:
Put his or her clients’ best interests ahead of their own, striving to be completely transparent and minimize conflicts of interest. In order to qualify as a fiduciary financial advisor, the advisor must exhibit the proper balance between the competing objectives of the client and the conflicts of interest that may arise. For instance, while making recommendations about the purchase of a specific retirement account might be in the best interest of the investor, the conflict of interest of the advisor may come into play when he or she recommends a particular investment scheme among the different opportunities out there in the market.
There are conflicts of interest that might come into play as well when a fiduciary financial advisor is asked to review a transaction with a buyer or an issuer of debt obligations. Another example might be when the fiduciary advisor has an ownership stake in a certain business that he is advising on behalf of a client. Although this type of situation is rare, it is not unheard of, and the outcomes of such conflicts could have a significant impact on the success of the investment plan.
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The Conflict of Interests Standards implemented by the Security Exchange Commission define the qualifications required of financial advisors, which includes being registered under the Security Exchange Act, having a fiduciary responsibility, and being subject to regulated professional review. There are other sections of the SEC’s rules and regulations that address issues of suitability or professional status that do not directly have anything to do with investments.
For instance, financial advisors may need to register with the SEC to qualify for certain activities, such as offering financial advice to clients. Other areas that might require a registered investment advisor to meet suitability standards include serving as an additional trustee of a complex estate planning account, being involved in the preparation of a trust or power of attorney for another individual, or being involved in the management of a self-directed IRA. Being registered with the SEC as a fiduciary also makes one eligible to be a member of the National Association of Securities Dealers, which sets the standards for suitability.