In your search for the right professional to help plan for your golden years, do you know the difference between a fiduciary and nonfiduciary adviser?
A nonfiduciary adviser is governed by the 1933 Securities Act and is held to a standard known as suitability: Is the product or investment suitable for the client at the time of recommendation?
A fiduciary adviser is governed by the Securities Act of 1940 and state securities laws. The adviser has a fiduciary duty to provide clients with unbiased, objective advice. The higher legal standard requires full and fair disclosure of all facts. The facts must align with client needs, objectives and goals.
This adviser must determine if the fiduciary relationship is in the client’s best interest before opening the account. Typical clients are busy, lack financial expertise and feel comfortable delegating day-to-day management of the assets.
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Financial fiduciaries continually monitor client investments and changing family circumstances. Information gathering is just the first step in a discovery process that unfolds over the length of the relationship.
The adviser may offer added services such as retirement planning. The client may grant the adviser discretion, which means the adviser is not required to call before making an investment.
Most advisers run diversified investment models to simplify investment selection. This allows for block trading of investments, such as substituting one manager for another, or creating tax losses in a position at year end.
Advisory programs are accessed through a written agreement that spells out what services are offered in exchange for a fee. The custodian who holds the assets may provide performance reporting, statements and tax summaries. Planning-based advisory practices may provide full retirement planning services.
Regular, proactive communication is required. Most advisers will describe an annual service level that includes review meetings, phone calls and client educational events. They may offer a newsletter or periodic communications to explain recent market or economic changes.
Many options exist for the individual investor, from discount trades and robo-advisers to full-service investment advisers and planners. Understanding key differences between fiduciary advice and suitability is a good starting point for choosing your adviser.
Mark Daly is managing director, investment officer, Daly & Vachek Investment Consulting Group of Wells Fargo Advisors. dvicg.com; 333-1433. Advisory accounts are not designed for excessively traded or inactive accounts and may not be suitable for all investors. Review questions with your financial professional. Information in this article came from sources deemed reliable but is not guaranteed. The opinions expressed are those of Mark Daly and not necessarily those of Wells Fargo Advisors or its affiliates.