You trust your financial advisor every day to maximize your investments and save you money. In a lot of ways, your retirement is in the hands of your financial advisor as he is the one that guides you to retirement savings and investment plans.
However, just because you trust your financial advisor doesn’t mean you should. You’d be surprised at the number of financial advisors that don’t have their client’s best interests in mind.
There is a host of reasons why your financial advisor may not be making the best money decisions for you, from poor judgment and training, to personal financial gain, and lack of communication, making it hard to tell if you’re making the right choice to trust him. However, there is one easy way to get assurance if your financial advisor is acting in your best interests: ask him if he operates under the fiduciary standard.
The fiduciary standard requires a financial advisor to act in a client’s best interest. Conversely, the suitability standard requires a financial advisor to do what’s suitable for their client. What’s suitable doesn’t always mean what’s best. This is a major difference. For example, let’s say you invest $10,000 a year into a low cost investment and earn $1 million over a 30-year period. If you invest the same amount into a “suitable” investment, you can lost a few percentage points each year adding up to thousands of dollars in a 30-year period.
So what can you do? Work with RIAs and IARs.
- RIAs and IARs – Registered Investment Advisors (RIAs) and Investment Advisor Representatives (IARs) are financial advisors that are governed by the fiduciary standard, meaning they have to advise what’s best for you and your money even if it isn’t what’s best for them. These professionals never work on commission, and only charge fees for managing client’s assets and providing investment advice. RIAs and IARs can also offer additional services like tax help, which can come in handy every tax season. While not every RIA and IAR has this exact business model, the majority does.
- Registered Representatives and Insurance Agents – Conversely, registered representatives and insurance agents are not governed by the fiduciary standard, but rather the suitability standard. These professionals generally sell on commission, so they tend to act in their best interests rather than in yours. Some registered representatives are beginning to offer fee-based services, but the FINRA is still working on establishing guidelines. In addition, they are not able to offer any other services. These firms and companies rarely act in their client’s best interest, and are severely under-regulated.
The answer to whether or not you can trust your financial advisor is simple: does he operate under the fiduciary standard? If the answer is no, you might want to consider getting a new financial advisor.
You can start your search for reliable RIAs and IARs here. You can also check up on your current financial advisor by visiting NASAA.org to verify his license, or AdvisorInfo.gov to learn about his background.
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