What does "I am a fiduciary" even mean?

Sean defines "fiduciary" with a little help from the Eternal Source of Truth - Wikipedia. Then he talks about financial advisors who are or aren't fiduciaries, and what that means for you.

Transcript

Sean 0:00

Hey there, Sean Kernan with How to Find a Financial Advisor. If you find these videos helpful, please hit the like button and the subscribe button below. That'll help other people find this resource as they're trying to sort out how to best use or not use a financial advisor. So one very, very common recommendation I'm sure you come across in your search for a financial advisor is make sure they are a fiduciary. So that's great advice. I don't think anyone would ever say look for someone who is not a fiduciary. But I think it's critical to have at least a basic understanding of what a fiduciary is. So I went to that eternal source of truth, Wikipedia, and I'm going to read the definition and then go into how to take into account fiduciary or non-fiduciary advisors and what that means to you. So a fiduciary is a person who holds a legal or ethical relationship of trust with one or more parties. Typically, a fiduciary prudently takes care of money or other assets for another person. In a fiduciary relationship, one person in a position of vulnerability justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times to the sole benefit and interest of the one who trusts. So this is applied in most professional services, legal profession, medical profession, real estate agents are supposed to have fiduciary duty to their clients. And you would hope all people giving advice about money would have a fiduciary responsibility to their clients. So the best way to determine if someone has a legal fiduciary responsibility is to look at the licenses they hold. So, and a lot of that is related will translate into the comp how you're compensating your advisor. So usually if you're compensating someone on a transactional basis, in other words, you're paying some sort of commission for transactions, that is usually a brokerage type of relationship. And typically you do not have a fiduciary responsibility, at least legally. That's changing with some of the laws and Department of Labor rules that are kind of in play as we speak, but in early 2024. But in general, historically, if you had a brokerage relationship, there was a suitability standard, not a fiduciary standard. So it just I've heard this described as you just had to make sure that as the the broker, you had to make sure that they, if you were uh the piece of clothing or the investment fits. Um the fiduciary standard, which is typically more of a uh a compensation based on the value of accounts, not related to transactions or flat fee or other or sort of project basis, not related to how much activity there is or a transaction. That advisory relationship typically has a fiduciary standard. And instead of just making sure that the clothing fits, if you will, the metaphor is it has to also look good on you. So it's not just yet you can wear it, it fits, it's does it look good, does it present you well? So that's one metaphor I've I've heard I think is a good, a good fit. Uh, excuse the pun. So if you ask someone, are they a fiduciary, they're probably gonna say yes. Um, and if you're like most people and you don't have the tools to to really drill down on that just to confirm, it's helpful, but um, I'm not sure it's the best way to ask the question. So I would typically recommend if you're gonna ask someone about their fiduciary or not status, um, I'm gonna ask a more open-ended question. For example, um, tell me about your fiduciary relationship or tell me about the fiduciary versus suitability standard, something somewhat more obscure, and give them a chance to explain. So um, I think a lot of the fiduciary standard stuff is helpful, but it's it's a pretty low bar because um there have been criminals who have been held to the fiduciary standard, but it's just obviously not enforced because it's very hard to uh to check every action and decision for is this the right thing for you? Is this the right thing for you? Because if you're giving financial advice, financial planning advice, you should be thinking about the very long term what the end client, what you are looking for now, and what your stated goals are over decades sometimes, and that's very hard to do. So uh grading someone as a fiduciary to the positive is difficult. Now, you can it's obvious, it's easy for an outsider uh to the relationship that's an expert in the field to say if something was not done in a fiduciary manner, some oftentimes. We so as a another professional can say this was not doesn't look like a good fit. It appears to be to have done only to generate a commission for the person recommending it, who would not really be an advisor, they would be a broker. Um, and over time I think that that uh phenomenon is getting less and less as more and more advice is delivered at a fiduciary standard. Um but like a lot of things, this is a lot easier to say what's wrong versus saying this is definitely right. Um, and here's an example that I that I go to a lot. I know people who who work on a commission basis that have been doing that forever, and because when I started uh 22 years ago, that was a more common way of doing business. And I know dozens of advisors who started that way, and some of those people are still doing business in a commission basis, and I would trust my wife's and kids' money with them if something happened to me because I know they're gonna do the right thing, I understand their character, I know how they think about things, they've just always done it that way, and on the investments, I think it works fine, especially if you're not making changes all the time, driving up the cost of investing. Um what happens in that scenario is you may not get the full comprehensive planning advice if the compensation is only based on the investment transactions. But on the flip side, the same thing can happen in a advisory assets owner management relationship where you do have a fiduciary standard, but if the compensation is all based on the investments, unless your uh advisor is thoughtful enough and really focused on the total comprehensive planning, um, and you don't ask questions or insist on getting advice around everything, you and your advisor will tend to focus on the investments, and that's a critical part of most people's plan, but it's certainly not inclusive of everything that you should probably be thinking about for your uh financial picture. So I know this is winding a little bit, but fiduciary is a probably an ideal minimum standard, but I wouldn't stop with oh yes, I'm a fiduciary. Because one, I've seen people that have other licenses that murky the answer, say, yep, I'm a fiduciary, and you know, a lot of people check it off the checklist. Well, they said they're a fiduciary, um, and and if you're not a fiduciary, if you're someone who's trying to do something uh the wrong way on purpose, you might answer yes to the fiduciary, even though you don't even have any licenses that would lead you to be the fiduciary. So trust but verify, and don't always trust right off the bat because it's good to have a second opinion. Um I'm happy to evaluate if you have somebody that you're talking to, do a little bit of basic research from my end, looking at publicly available information to show where the nuance might be on this fiduciary's question. And also, if you're working with someone who you're not sure uh you like them, you trust them, but you're not sure how to feel about if they're not a fiduciary by the regulations. I'm happy to give my two cents from a little conversation on if you, you know, if that feeling should be um if you should trust your gut or if there are little warning signs that maybe you're not getting what you think you're getting. So that is what I do and how to find a financial advisor, mostly because I love talking about this stuff, and I'm happy to provide uh unbiased direct advice to you with no strings attached, uh especially while I'm building out this uh this platform. So let me know if I can help. And again, if if you think this will provide value to others, please hit subscribe and see you in the next video.