Fiduciary vs Broker – How to Choose a Financial Advisor

 

Before you start trusting someone else with your money, there are a couple words that need to be in your vocabulary. 

 

One of these words is “Fiduciary.” 

 

Say it five times. Get it locked in your brain. It is important. 

 

 

What Does Fiduciary Mean?

 

In the financial advising world, the term “fiduciary” means a financial advisor who is legally obligated to do what they think is in your best interests. They have a “fiduciary” obligation to do what they can to make the right decisions with your money based on your goals. 

 

When you hire a financial advisor who is a “fiduciary,” it means they legally must advise you to do what they think is best for you. 

 

The best way to know if you are hiring a fiduciary to manage your money is to ask a very simple question:

 

“Are you a Fiduciary?”

 

Yes, it seems simple. But there are TONS of financial advisors out there who do not have a fiduciary responsibility to do what is best for you or your money. 

 

What Is a Broker?

 

In financial advising, a broker is someone who can legally buy and sell securities on your behalf. Want to be invested in the stock market? A broker can help you buy and sell stocks. 

 

However, a broker does not have a legal obligation to do what is in your best interests. Will they do what is in your best interests anyway? Maybe. I tend to think the best of people so I don’t want to assume all brokers are bad. However, some brokers will recommend investments because they’ll earn a higher commission on the recommendation and not because it is what is best for you. 

 

I’d recommend you give yourself the peace of mind of finding an advisor with a fiduciary responsibility to do what is in your best interests. This means you might have to say “No” a few times before the right advisor comes along. 

 

What is a Registered Investment Advisor (RIA)?

 

A Registered Investment Advisor (RIA) is a person or firm that has a fiduciary responsibility to you. They have a legal obligation to always do what is in your best interests.

 

So beyond the initial question of, “Are you a Fiduciary?” You could also be asking, “Are you a Registered Investment Advisor?” If you want to feel really comfortable working with someone to invest your money, the answer to these two questions should most likely be a resounding, “Yes.”

 

The Truth About Financial Advisors

 

The sad truth in America is that a large amount of financial advisors are simply brokers. By the way, how the word “broke” made its way into a financial profession is beyond me. 

 

A broker can buy and sell investments on your behalf. However, they do not have any legal responsibility to do what is in your best interests. If a broker wanted, they could simply choose an investment for you based on how much money it will make them. That doesn’t seem right, does it?

 

The Broker Dilemma

 

If you say, “But Kyle, even if my broker is not a fiduciary or RIA, I trust them.” Great! Do whatever you want. But I like having the peace of mind knowing my financial advisor is legally obligated to do what is in my best interests. 

 

Here’s the dilemma brokers may find themselves in:

 

If Investment A will make a broker a commission of 10% and Investment B will make them a commission of 5%, a broker is incentivized to recommend Investment A (because they’ll get paid more) even if Investment B is a better option for you.

 

Would your financial advisor recommend the one that is better for you or for them? A good way to know for sure is to work with a fiduciary advisor that is legally obligated to do what is best for you. 

 

How to Find the Right Financial Advisor

 

Knowing the difference between a financial advisor with a fiduciary obligation to do what is best for you and a broker who can do whatever he or she wants with your money is the key to finding a financial advisor worth trusting with your money. 

 

I’d strongly recommend finding a financial advisor who is a Registered Investment Advisor and has a fiduciary obligation to invest your money based on your best interests.

 

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P.S. You can also manage your own money on apps like Robinhood. If you click here to set up your Robinhood account, you will get a free stock when you register (and I will also get a free stock for referring you).