ARBOR WEALTH: Seek fiduciary standard in advisors

Published: Thursday, December 12, 2013 at 05:02 PM.

Editor’s Note: This is part three in a series on questions to ask your wealth advisor.

“But what if I could ask you only one thing …” — “Questions” by Jack Johnson

Perhaps the most important question an investor should ask when interviewing a potential investment advisor is, “Are you a fiduciary?”  

A fee-only investment advisor serves as a fiduciary, like a physician, CPA or attorney. Such an advisor is compensated by no sources other than his/her client fees, sells no products of any kind, accepts no commissions from any source, and must always act in his clients’ best interests, while providing full transparency and disclosure.

The Latin root of fiduciary is fiducia, which means trust, and can be defined as “one who holds something of value for another person … while serving that person’s best interests.” An investment advisor who serves as a fiduciary to his clients has a legal, moral and ethical obligation to act in the client’s best interests.

Fee-based advisors and stockbrokers are not fiduciaries. Some investors confuse fee-only and fee-based advisors. But sophisticated investors who are interviewing potential advisors are doing so with an increasingly impressive knowledge of the difference between the two.

“Does all your compensation come from your clients’ fees?” is an important corollary to the question, “Are you a fiduciary?” The advisor’s compensation origin is significant, because any employee’s loyalty is most likely tied to the source of his income. A potential conflict of interest exists if an advisor is paid commissions by a parent company for selling annuities, or for selling life insurance, or is paid commissions for investing clients’ assets into a parent company mutual fund.



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