While working to improve one’s overall financial health while building a life in Michigan, a person may enlist the professional assistance of a financial advisor. Doing so is a great idea, but an even better one is knowing that professional’s legal obligations and responsibilities.
U.S. News & World Report takes a deep dive into defining fiduciary financial advisors and how they differ from nonfiduciaries. Understanding the difference can clear up confusion and financial blind spots a person did not know existed.
Defining a fiduciary
When it comes to financial planning and advising, a fiduciary is a professional who has an obligation to conduct business in good faith and trust and with complete honesty. With everything they do, advisors and planners have to operate in the client’s best interest. This is an important distinction between a nonfiduciary because a nonfiduciary can put her or his compensation and profits before a client’s best interest.
Suitability standard
It is important to point out that a nonfiduciary advisor still works to help clients make proper financial decisions. As long as the advice is in line with a client’s specific financial situation, an advisor adhering to the suitability standard can discuss the recommendation with the client, regardless of the bearing it has on the advisor’s commission.
Also, the suitability standard does not require an advisor to sit down and have an in-depth conversation with clients regarding a recommendation or advice to ensure she or he has a full understanding of the situation. Nonfiduciary advisors do have to share conflicts of interest involved in financial dealings, but they do not have to go out of their way to avoid those conflicts.
Advisor compensation
Fiduciary advisors are fee-based, meaning they receive fees and commissions, or only receive fees for compensation. Nonfiduciary advisors receive compensation either through fees or commission. It is commission-based compensation that often leads to the biggest conflict of interest. Clients who make trades more than necessary could lose more money than necessary, all while earning their nonfiduciary advisor higher commissions.
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