As an investor, you want to make sure anyone you hire to help you handle and grow your wealth is competent enough to do so. Sadly when it comes to financial advisors, it is harder than you might think to find a competent one. This is because so few had been acting as a fiduciary.

But this changed when a law was passed in 2016 that requires investment professionals to act in their client’s best interest. As of this writing, many people and firms are fighting this rule, but as for now, investment professionals must follow the law.

You may be wondering what exactly is a fiduciary and why is it important that your investment professional is one. In this post, I will walk you through what a fiduciary is and 3 reasons why you need to make sure you are dealing with one.

What Is A Fiduciary?

A fiduciary is a person or a business that acts in another’s best interest. In all situations relating to their relationship, there needs to be complete trust, faith and honesty.

When it comes to your investments, you give your investment professional the ability to make trades on your behalf, without your consent. They do this by first sitting down with you and creating an investment plan based on your goals, time horizon, and risk tolerance.

Because a fiduciary works for you without you first consenting, you can rest assured that they are working in your best interest at all times.

3 Reasons You Need A Fiduciary

#1. Must Act In Your Best Interest

As a fiduciary, an investment professional has to act in your best interest at all times. This means putting you first over their own potential profit. For example, when you create an investment plan with an investment professional, they have to follow this plan exactly as it is laid out.

If your plan says you are to be invested in 100% fixed income, they have to follow this. If they are paid based on assets under management, they cannot put you in equities so your balance rises faster and they can earn a higher fee off of you.

Likewise, if they hear a hot stock tip, they cannot just invest your money into this stock, regardless of how sure they are it will make you money. If it is not a fit for you, they cannot do it.

#2. Clear Fee Structure

As a fiduciary, an investment professional has to clearly show and explain how they are compensated. So if they take a percentage of assets under management as their fee from you, they have to explain how much the fee is and how and when they get paid.

In addition, if they earn commissions on products they sell, they need to disclose this to you upfront. This is important because many investment professionals who are not fiduciary’s don’t disclose this information to you.

The result is you not knowing if they are recommending an investment to you because it is a good fit for you, or if they simply earn a commission by selling it to you.

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