Broker Check
The Rise of the Fiduciary Financial Advisor

The Rise of the Fiduciary Financial Advisor

April 10, 2024

The world of financial planning is rapidly changing and is often confusing. By making the decision to hire a financial advisor, you can protect yourself from the risks presented by the market and position yourself for long-term growth and stability.


Of course, it is one thing to decide that now is the time to hire a financial advisor. But even once you decide that doing so is the right decision, you’ll also need to consider the type of financial advisor you hope to help you along the way.


Every financial advisor you’ll ever encounter will be unique. Some might prefer risky, high-potential investment options while others will be a bit more conservative. Others might prefer one asset class over another or prefer a particular diversification strategy.


And, of course, while some financial advisors will be fiduciary, others will be “non-fiduciary.” As you will quickly discover, whether or not you choose to work with a fiduciary financial advisor can have a major impact on your financial health and long-term fiscal stability.


If you find yourself wondering, “what is a fiduciary financial advisory?”, then you are certainly not alone. In this comprehensive guide, we will discuss some of the most important things to know about fiduciary financial advisors, including what they are, the services and benefits they provide, and how you can find one that is compatible with your current financial goals.

If you'd like to speak with an Inspire Financial Planning Accredited Investment Fiduciary, click here to set up an appointment at one of our North Carolina service areas in Wilmington, Charlotte, Raleigh, Greensboro, and Asheville. We also work with clients across the U.S. and have recently opened up wealth management services in Newport Beach, California.


By taking the time to understand the beneficial role fiduciary financial advisors can fulfill, you’ll be able to decide if working with one is in your personal best interest. Let’s take a closer look:

What is a Fiduciary Financial Advisor?

 

All financial advisors and financial representatives are required, by law, to provide financial advice that they believe is financially beneficial for their clients. They cannot, for example, tell you to make an investment in a company they somehow know is going to fail.

 

However, while they might not be able to give you bad investment advice, not all financial advisors will give advice that is completely objective and independent. If they are an advisor for XYZ Company, they will be especially likely to tell you to buy an XYZ life insurance policy—especially if doing so provides them with some sort of benefit, like a commission.

 

Keeping this in mind, it is unsurprising that many people, particularly high net worth individuals (HNWI), want an advisor who is completely independent and is solely motivated by providing the best possible investment outcomes for their clients. This need created the rise of the fiduciary financial advisor.

 

A fiduciary financial advisor is a professional entrusted with the responsibility to act in the best interest of their clients. This legal and ethical obligation is known as the fiduciary duty. Fiduciary advisors are required to prioritize their clients' interests above their own, ensuring they provide advice and recommendations that align with the clients' financial goals.

 

As you’d probably expect, there are many reasons why these advisors are in such demand. One of the most notable aspects of being a fiduciary is the duty of loyalty. This means the advisor must avoid conflicts of interest and disclose any potential conflicts to their clients. They must also ensure that any advice or recommendations they provide are based on thorough research and analysis, and are in the best interest of the client, even if it means recommending a course of action that may not be the most profitable for the advisor.

 

Fiduciary advisors are held to a higher standard than non-fiduciary advisors, such as brokers or financial planners who are only required to recommend investments that are "suitable" for their clients. The fiduciary standard is considered stricter and more client-focused, as it requires advisors to always act in the client's best interest, regardless of the advisor's own interests or incentives.

 

Whether you choose to work with a fiduciary financial advisor or not, it is important to take some time to try to understand why they are making specific recommendations. For example, suppose they suggest investing in a whole life insurance policy. Why do you think they made that specific recommendation? Why did they choose that specific amount of coverage? Why did they choose that specific policy?

 

These questions often have perfectly clear and reasonable answers. For example, maybe they recommended the policy because you have several dependents and a certain amount of coverage would provide guaranteed financial security. But ensuring that the recommendation was made because it was solely in your best financial interest can help further ensure that you are moving in the right direction.

 

Benefits of Working with a Fiduciary Financial Advisor

 

Currently, there are nearly 690,000 financial advisors operating in the United States. However, within this group, the majority are dually registered advisors, meaning that the services they provide are connected to a specific company and that they can charge both a fee and a commission. Most of these dual-registered advisors work for household names like Merrill Lynch, Edward Jones, Morgan Stanley, and Ameriprise.  Only a portion—or about 11% of these advisors are independent fiduciary financial advisors. They do not technically work for a large Wall Street firm driven by sales, commissions, and quotas. They work for their clients. See the difference?

 

In other words, if you are working with a financial advisor or wealth manager, there is only about a one in ten chance that the person you are working with is not dealing with a major conflict of interest like a non-fiduciary or dually registered advisor. But despite their relative scarcity, many people find that fiduciary financial advisors are well worth the associated costs.

 

The most obvious benefit of working with a fiduciary advisor is the assurance that their advice is unbiased and objective. Fiduciary advisors are required to recommend investments, strategies, and products that are truly in the best interest of their clients, even if it means recommending a course of action that may not be the most profitable for the advisor. This commitment to prioritizing the client's interests can help clients avoid potentially harmful financial decisions and ensure that their financial goals remain the focus of the advisory relationship.

 

Another advantage of working with a fiduciary advisor is the level of transparency and trust that it fosters. Fiduciary advisors are required to disclose any potential conflicts of interest and provide full transparency regarding their fees, compensation structures, and any other relevant information. This transparency can help clients feel more confident in their advisor's recommendations and can build a strong foundation of trust in the advisory relationship.

 

Additionally, fiduciary advisors are typically held to a higher standard of professionalism and expertise. They are required to act with diligence, care, and skill in providing financial advice, ensuring that their recommendations are well-researched and based on sound financial principles. This can provide clients with greater confidence in the advice they receive and can help them make more informed decisions about their financial future.

 

How Do Fiduciary Financial Advisors Get Paid?

As indicated, people often choose to work with a fiduciary financial advisor because these advisors are able to offer fair and objective financial advice that can help them achieve their goals. However, as is the case when hiring any contractor to do anything, it is important to understand how fiduciary financial advisors get paid.

 

Fiduciary financial advisors can be compensated in several ways, and the method of payment can vary based on the advisor's business model and the services they provide. One common method of compensation for fiduciary advisors is a fee-based structure, where clients pay a fee based on a percentage of the assets under management. This fee is typically calculated as a percentage of the total value of the client's investment portfolio and is charged annually or quarterly. Fee-based compensation aligns the advisor's interests with those of the client, as the advisor's compensation increases as the client's portfolio grows.

 

Another common method of compensation for fiduciary advisors is a fee-for-service model, where clients pay a fee for specific financial planning services, such as retirement planning, tax planning, or estate planning. This fee is typically based on the complexity of the services provided and the amount of time and expertise required. Fee-for-service compensation ensures that clients are only paying for the services they need and can provide more transparency regarding the cost of financial advice.

 

Some dually registered financial advisors may also receive compensation through commissions or sales charges on financial products, such as mutual funds or insurance products. While this method of compensation is not inherently unethical, it can create conflicts of interest if the advisor is incentivized to recommend products that may not be in the client's best interest. To mitigate these conflicts, financial advisors who receive commissions are required to disclose these arrangements to their clients and ensure that their recommendations are still in the client's best interest.

 

If you are still unsure how a prospective advisor is compensated, it is perfectly reasonable within this industry to go ahead and ask them. After all, they want you to be confident when making your final decision.

 

Is a Fiduciary Financial Advisor Worth the Cost?

As expected, the cost of working with a fiduciary financial advisor can vary depending on several factors, including the advisor's fee structure, the complexity of your financial situation, and the level of service you require. On average, fiduciary advisors may charge fees ranging from 0.5% to 2% of assets under management annually. For example, if you have $500,000 in investments and your advisor charges a 1% fee, you would pay $5,000 per year for their services.

 

In addition to AUM fees, some fiduciary advisors may charge hourly or flat fees for financial planning services. Hourly rates can range from $100 to $400 or more per hour, while flat fees for comprehensive financial plans may range from $1,000 to $5,000 or more, depending on the complexity of your situation.

 

Whether the cost of a fiduciary financial advisor is worth it depends on your individual financial situation, goals, and preferences. For some people, the peace of mind and confidence that comes from working with a fiduciary advisor can justify the cost. Fiduciary advisors can provide personalized financial advice tailored to your specific needs, help you navigate complex financial decisions, and provide ongoing support and guidance to help you achieve your financial goals.

 

Alternatives to Fiduciary Advisors

While fiduciary advisors offer a high standard of care and are legally bound to act in their clients' best interests, there are alternatives available for those seeking financial advice. One option is working with a non-fiduciary advisor, such as a broker or a financial planner, who is held to a suitability standard. These advisors are only required to recommend investments that are suitable for their clients based on factors such as risk tolerance, financial goals, and investment timeline. However, they are not legally required to prioritize their clients' interests above their own, which, as suggested, can lead to potential conflicts of interest.

 

Robo-advisors

 

Another alternative to fiduciary advisors is using a robo-advisor, which is a digital platform that uses algorithms to provide automated, algorithm-driven financial planning services with little to no human supervision. Robo-advisors can offer lower fees compared to traditional advisors, making them a more cost-effective option for some investors. However, they may lack the personalized advice and human touch that many clients value in a financial advisor.

 

While there are alternatives to working with a fiduciary advisor, there are several reasons why working with a fiduciary advisor is usually the superior option. Fiduciary advisors are required to act in their clients' best interests at all times, which means they are less likely to recommend investments or strategies that may benefit them more than their clients. This can help clients avoid potential conflicts of interest and ensure that their financial goals remain the focus of the advisory relationship.

 

Additionally, fiduciary advisors often provide a higher level of expertise and personalized service compared to non-fiduciary advisors or robo-advisors. They can offer customized financial plans tailored to their clients' individual needs and provide ongoing support and guidance to help clients navigate the complexities of the financial world. This level of personalized service and attention to detail can help clients make more informed decisions about their financial future and feel more confident in their overall financial plan.

 

Things to Consider When Choosing a Financial Advisor

 

If you’ve decided that you want to work with a fiduciary financial advisor, the next decision you will need to make is who you actually want to work with. The best financial advisor for you will depend on many factors, which is why it is important to take some time to do your research before making a final commitment.

 

Here are a few of the most important things to consider when comparing your available options:

 

Fiduciary Duty: First and foremost, you need to determine if the advisor is a fiduciary, which will ensure they are legally obligated to act in your best interest at all times. If they are dually registered with a large Wall Street firm, you need to understand how this dual registration elevates the conflicts of interests.


  • Fee Structure: Understand how the advisor is compensated, whether through fees, commissions, or a combination. Compare the total costs of each advisor's services.
  • Experience and Credentials: Look for advisors with relevant experience and credentials, such as Accredited Investment Fiduciary (AIF), Certified Financial Planner (CFP) and Chartered Financial Analyst (CFA) designations.
  • Services Offered: Consider the range of services offered by each advisor, such as investment management, retirement planning, tax planning, and estate planning, and ensure they align with your needs.
  • Investment Approach: Understand the advisor's investment philosophy and approach, including their risk tolerance and strategies for managing investments.
  • Clientele and Specialization: Consider the advisor's typical client profile and whether they specialize in working with clients in similar financial situations or with similar goals as yours.
  • Technology and Tools: Assess the advisor's use of technology and tools for financial planning and investment management, and determine if they align with your preferences for managing your finances.
  • References and Reviews: Seek references from current or past clients and look for online reviews or ratings to gauge the advisor's reputation and track record.
  • Regulatory History: Check the advisor's regulatory history, including any disciplinary actions or complaints, to ensure they have a clean record.
  • Personal Compatibility: Consider your personal rapport with the advisor and whether you feel comfortable discussing your financial goals and concerns with them.
  • Transparency and Disclosure: Look for advisors who are transparent about their fees, compensation, and any potential conflicts of interest and who provide clear and thorough disclosures.
  • Philosophy and Values: Consider the advisor's overall philosophy and values regarding financial planning and wealth management, and ensure they align with your own beliefs and priorities.
  • Accessibility and Location: Evaluate the advisor's accessibility and location, especially if you prefer to meet in person or have specific preferences for how you interact with your advisor.

 

Financial advisors—fiduciary or not—are aware that you have many options available to choose from and want to make sure that your capital is being carefully managed. It is common to conduct an initial interview, or even multiple interviews, before deciding to hire someone as your fiduciary financial advisor.

 

Wealth Management That’s Right for You

 

If you are an ultra-high net worth individual—or are even just aspiring to become one—it will be important to have a financial advisor that you can be confident is on your side. For households with an eight-figure net worth, for example, just a 1% change in performance can result in a multi-million dollar difference in outcomes.

 

Finding an experienced, compatible fiduciary financial advisor can have an incredible impact on your financial well-being. These advisors are well-versed in a variety of investment options and have the flexibility to work solely in pursuit of the best interests of their clients, rather than having to worry about the needs of a particular firm.

 

As committed fiduciary financial advisors, we are confident that we can make a positive difference in your life and help you achieve your financial goals. Click here to schedule a call with an Inspire wealth advisor today.

Andrew Paniello is a freelance finance writer. Andrew has degrees in Political Science and Finance. He has worked for Northwestern Mutual and Berkshire Hathaway before becoming a full-time writer. You can learn more about Andrew here