Whom Do You Trust?

Choosing a wealth management partner, the person with whom to trust your money and investments, is one of the most important financial decisions you will make in your adult life. It is crucial to work with a financial advisor who is also a fiduciary.

Many firms and individuals call themselves a financial advisor, investment manager, money manager, wealth advisor or broker, but are they a fiduciary? What does it mean to be a fiduciary, and what does that mean to you as an investor?

Understanding the differences between a fiduciary and non-fiduciary is imperative because it affects the quality of wealth management advice you receive and the type of professional providing it. Legally, there are two criteria that govern financial advisors: the fiduciary standard and suitability standard. Under the suitability standard, advisors must make sure investments purchased for clients are suitable for their clients’ needs. The investment does not even have to be the best option. It only has to be appropriate for the client.

With the fiduciary standard, advisors are required to act in the best interest of their clients. That means the advisor has to evaluate a variety of factors when recommending investments, including the riskiness of the investment, reasonableness of fees and any potential for conflicts of interest.

Fiduciaries and non-fiduciaries are also compensated differently. Here are two key differences:

• Non-fiduciary advisors may receive commission fees on the investments they recommend. This form of compensation opens the door to potential conflicts of interests between the advisor and the client. For example, the advisor may recommend a mutual fund with hefty front-end fees (and receive a commission from the sale) — even when similar, but less expensive options are available.

• Fiduciary advisors are compensated by charging agreed-upon fees for providing investment services. Generally, the fees are based on the monetary value of assets under management or, in some circumstances, an hourly rate for services. These advisors are not paid by what investment product they purchase for a client, and they do not earn a commission or trading fees.

Research by the U.S. Council of Economic Advisors found that conflicted advice provided by financial planners reduced client investment returns by around 1% each year — with the total loss exceeding $17 billion each year.
Because a fiduciary is legally required to always act in your best interest, you are much more likely to work with a professional who you trust. According to a survey by wealth management research firm the Spectrem Group, 55% of investors cited trust as the main reason they chose to work with an advisor. The next two factors were expertise (46%) and education about investing (40%).

It can be challenging to find an advisor who you will trust with your hard-earned wealth. Here are three tips to help you on your wealth management journey:

• When selecting an advisor, talk to your most trusted friends, relatives and neighbors, and ask them who they would recommend. When interviewing wealth management advisor candidates, ask them up front if they will be serving you as a fiduciary.

• Make sure the advisor has a clear understanding of your current and future goals, cash flow needs and tolerance for risk. There is no one-size-fits-all approach to building wealth because no two clients are the same, so talk to advisors about how they customize their approach for different client needs.

• Work with an advisor who also has the necessary resources — IT systems, client support teams and secure communications channels, for example — so you feel confident they have the tools to provide you superior service and help you achieve your goals.

I believe that being a fiduciary is the gold standard for serving clients. Being a fiduciary means being loyal to your clients, building long-lasting relationships and fully understanding their needs to help them achieve their financial life goals. It’s not about using complex investment models. It’s about providing clients with easy-to-understand financial plans that can be modified quickly when needed.

Jill Knight Nalty serves as business development officer for Argent Trust Company. Knight Nalty, who has more than 15 years of trust, finance and banking experience in New Orleans, is responsible for new client outreach and strengthening current customer relationships. She may be reached at jnalty@argenttrust.com or (504) 291-8860.