In our last blog What are the “standards of care and protection” offered by financial advisors?, we discussed that not every financial advisor is legally required to act in your best interest.
We reviewed the two standards of care advisors can fall under, and quickly concluded that a professional fiduciary advisor is clearly a better choice for consumers. In this blog post, let’s look at what is the actual job of a professional fiduciary financial advisor and what do they actually do.
Financial Advisors Cannot “Beat the Market”
There is a common misconception that financial advisors can pick the best investments that will beat the market and time the market so you can avoid market downturns. That is not what professional fiduciary financial advisors do, because it is simply impossible to do over a sustained period of time. If you look at the evidence, it is nearly impossible for anyone to consistently predict or outperform the stock market over a long period of time.
What Is the Financial Advisor’s Role?
If the advisor is not going to beat the market, why are you hiring one? A professional fiduciary financial advisor spends much of their time researching not just investment strategies, but financial strategies. The primary purpose of hiring a financial advisor is to get help to meet all of your financial goals and achieve independence. While having the right investment mix is an important tenet in achieving financial success, it is not and often times should not be the only role of a professional fiduciary financial advisor.
A financial advisor should first get to know you and what you want out of life. They help you formulate goals and understand your fears. They take inventory of all your available financial resources, including your assets, liabilities, earnings potential, risk management strategies, estate planning, etc. They help you formulate a long-term financial plan and come up with financial strategies to help you achieve your long-term goals.
Their services include portfolio rebalancing, insurance reviews, budgeting, estate planning, college planning and preparing for retirement. They will help you select the right risk management program, the proper investments, help you set targets for savings, spending, eliminating debts etc.
An advisor also helps with non-traditional investments, like buying and selling real estate. They can assist with an objective evaluation on the purchase of a second home or investment property. They can also help with conversations about upsizing or downsizing a primary residence, based on the client’s needs. Their guidance helps you pay down and pay off debt.
It goes without saying that they should be highly competent, credentialed, and educated in the field of personal finance, investment and taxation. They should be your advocate and bulldog to make sure financial companies do not take advantage of you. They should explain complex ideas and frame things in a manner that can help you make good financial decisions.
Professional Financial Salespeople vs. Professional Fiduciary Financial Advisors
Financial salespeople sell commissioned products with no fiduciary responsibility to their clients. An individual selling life insurance, annuities, or investment vehicles is not a professional fiduciary financial advisor. They are a life insurance or financial salesperson representing a financial company and selling products on their behalf.
While many financial salespeople claim to offer many of the services mentioned above, their primary responsibility is to represent financial companies and sell you their products.
On the other hand, the job of a professional fiduciary financial advisor is to represent you and not a financial company. True personal financial planning should take place in a fiduciary relationship where the advisor devises and helps implement financial strategies that are always in your best interest and help you achieve your financial goals. You should pay the advisor directly for this service and they should charge a fair and transparent price for it.
Given this backdrop, in our next blog post we will focus on how professional fiduciary financial advisors charge for their services and how much you can expect to pay. We will outline potential conflicts of interest and point out the pros and cons of the prevailing method by which they charge. And, we will suggest the possibility of a better way to go about working with and compensating a professional fiduciary financial advisor.