Looking for the right financial advisor can be daunting. At Stewardship Financial, we want to make this process easier and more comfortable for each of our customers. One of the best ways we do this is by highlighting something we feel is highly important: being a fiduciary.
Working with an advisor who is a fiduciary is the best way to reach your financial goals. Below, we outline three types of advisors you may come across in your search. We want to provide practical tips to help you align with one who is a fiduciary.
What is a fiduciary?
A fiduciary is someone who legally must act in the best financial interest of his/her clients.
Are all advisors fiduciaries?
No. The term, “financial advisor,” can be used by many different financial professionals and isn’t a standardized job title. The three most common financial advisors are stock brokers, insurance agents, and investment advisors.
Most financial advisors fall into this category. A stock broker, also called a registered representative, works for a brokerage company and is licensed to sell investment products and receives a commission. Examples of brokerage companies include Edward Jones, Commonwealth, Merrill Lynch, and Fidelity. Stock brokers pitched stocks for years (think The Wolf of Wall Street), until the Internet made it cheap and easy for investors to buy stocks themselves. Now, stock brokers have pivoted to sell other products—namely mutual funds.
Just like their name suggests, insurance agents are licensed to sell insurance products like life insurance and annuities. Annuities drive big business for these companies and bring sizable commissions for the agent. Insurance agents typically use other job titles such as, “retirement planner,” since their products cater to pre-retirees.
Investment advisors manage investment accounts or give financial planning advice. These advisors charge a fee instead of getting commissions. They are licensed with the SEC (Securities and Exchange Commission) or state securities departments.
Is my advisor a fiduciary?
Of these three, only investment advisors are required to act as fiduciaries. By law, investment advisors give investment-related advice to their customers. If you are paying someone to give financial advice, you should expect the advice to have your best interest in mind.
Don’t brokers and insurance agents give advice too? Not necessarily. Brokers are hired by a brokerage firm to be salespeople. Their job is to sell products that generate commissions for their firm. This means that they are incentivized to sell you a product that pays them more. Any advice a broker gives a customer is merely incidental to the sale of the product. As a result, brokers are not held to a strict fiduciary standard, but to a lesser suitability standard. This means the product he is selling only needs to be suitable, not necessarily in your best interest. This can mean you purchase expensive, underperforming mutual funds with hefty five percent sales charges and little follow-up and monitoring of your financial situation.
Anything else I need to know?
- When researching an advisor, look at the website footer. If it states, “securities offered by…” this means he’s a stockbroker who works for a brokerage firm—not a fiduciary.
- An advisor can be both a broker and an investment advisor, so long as they are registered as both. This means they can act in either capacity when meeting with you. Often, they act as both a broker and an investment advisor for the same customer, meaning they must tell the customer which role they are acting in whenever giving advice. Confused? I am, too.
- The Department of Labor recently passed rules requiring brokers to act as fiduciaries for all their clients. However, brokerage firms fought hard against these and its status is unclear with the new Trump administration, which opposes this rule.
Is Stewardship Financial a fiduciary?
Yes, Stewardship Financial is a Registered Investment Advisor and our advisors are fiduciaries by law. This means we put your interests first when we manage your investments or give financial advice. We hold ourselves to a high ethical standard, which is why we operate as fiduciaries. Working with an advisor who is not a fiduciary doesn’t make sense. No matter how knowledgeable or upstanding the advisor may seem, he operates a business model that doesn’t work for the best interests of its customers.
We like doing business this way and we think you will, too.
Want information on working with Stewardship? Let us know below.
Jake is a co-founder and Director of Investing at Stewardship Financial. In his role he gets to help people make smarter decisions on how to invest in the capital markets.