How To Know If Your Financial Advisor Is A Fiduciary

You hired a financial advisor. 

Everything was going great, but now you’re having some doubts. They’re pushing products you don’t need. You’re questioning if their advice will help you achieve your financial goals. And now that you think about—you’re not 100% sure how they’re paid. 

How do you know if your financial advisor is a fiduciary? 

Here are five good ways to tell that your advisor is a fiduciary (and two ways to know they’re not).

Signs Your Advisor IS A Fiduciary

1. They Connect With You Through a Financial Planning Process

A fiduciary advisor creates a comprehensive financial plan before they make investment recommendations. They ask you questions like: 

  • What are the big values that inform your life?
  • What kind of legacy do you want to create and leave behind?
  • What are some of your biggest financial challenges?
  • When would you like to retire?
  • Do you want to work at one career your whole life or transition to something different?
  • What are some things you are willing to give up to make your financial goals a reality?

A fiduciary advisor uses these answers to create an actionable financial plan that guides you toward both financial freedom and a better life.  

2. They Focus On Appropriate Risk 

Contrary to popular belief, your primary risk is not stock market volatility. The big risk is not reaching your financial goals. Your exposure to equity (or stocks) should provide a high probability of you reaching your planning goals.

A fiduciary advisor understands and explains the risk you need. They build your comfort level with short-term volatility in order to increase your chances of reaching your planning goals. In the real world, the innovation and productivity we find in the great companies of the US and the world is the driving force behind good long-term returns. You benefit from innovation and productivity through owning equities. 

3. They Suggest A Simple Asset Allocation Portfolio

A fiduciary advisor recommends you divide your portfolio across three asset classes: 

  • Equity assets
  • Fixed-income assets
  • Cash or cash equivalents

Equity is volatile (some refer to short-term volatility as risk – I do not), but has a high growth potential. Fixed-income is less volatile (risky) than equity, and comes with lower potential returns. Cash is stable and dependable, but falls in value over time (inflation). 

A fiduciary advisor understands that a client’s plan will tell them how much return is necessary to reach the client’s goals. If you need a 10% return, prepare for lots of volatility because this is only possible with a 100% equity portfolio. If you can save more, so that you only need a 6% return, you will need far fewer equities and will need to suffer far less volatility to reach your end-goals. 

A simple asset allocation portfolio (rebalanced regularly) gives you the greatest opportunity for long-term success. 

4. They Value Broad Global Diversification

A fiduciary advisor wants you to invest in large, medium, and small companies; companies in the U.S. and around the world; companies in various sectors and in different stages of development. 

Traders know that short-term investing requires that you are right as often as possible. Fiduciaries know that long-term investing is far more about avoiding being wrong. 

Broad diversification – owning a piece of everything – is the best path to more predictable long-term returns. Fiduciaries do not time the market; they don’t try to guess which investments will succeed next. They encourage you to stay broadly diversified.

5. They Suggest Liquid, Low-Cost Investment Tools

Investment tools are the individual products used to manage your investments. There are tens of thousands of product choices on the market, but many of them are incredibly similar. You cannot invest directly in an index. However, there are something like 15,000 different investment tools derived from the S&P500 index alone. Some are very expensive. There are plain vanilla S&P 500 mutual funds that carry expense ratios over 1% – all the way up to 2.33%. Some are low-low cost. There are plain vanilla S&P 500 mutual funds that carry expenses as low as .015% or .02%. 

An advisor held to a suitability standard may recommend products with higher internal costs to get a little higher commission for themselves. An advisor held to a fiduciary standard will put your interests first and seek lower-cost investment tools that both fit your plan and keep your hard-earned dollars where they belong – in your pocket. 

Signs Your Advisor Is NOT A Fiduciary

1. Excessive Activity, Trading, or Market Related Conversation

The best investment strategies are boring. They don’t involve a lot of management, excessive trading, monitoring, or action on your part.

The best investment strategy is all about four things:

  • Automating your deposits, 
  • Appropriately allocating your assets
  • Diversifying your portfolio, and 
  • Rebalancing regularly. 

It’s a passive approach, but it’s works over time. 

2. They Are Always Re-Acting

Great fiduciary advisors ACT based on a deep knowledge of their client’s goals and the plans they have created together to reach those goals. Amateurs (and brokers) seek opportunities to make changes to earn commissions. If they are fee-based brokers (yes, those exist), then they are often talking about changes that need to be made because they must be seen as DOING something. The training that informs this behavior is sales training. You should not see a fiduciary advisor reacting to market or economic shifts because they know:

  • Markets and the portfolios that approximate markets are not predictable or controllable in any way.
  • Short-term market volatility (risk) is the other side of the coin of long-term return. If you take away the volatility, you take away the return.
  • The volatility dissipates over time. The longer you hold your portfolio, the higher the probability your portfolio will approach and stick to your target return.
  • Many and varied cognitive biases routinely and completely blind us the first 3 bullet points in this list.

Fiduciary advisors go against the grain of everything the “financial punditry” is exclaiming is critical to our survival precisely right now. Fiduciaries are, in this way, counter-cultural. They force you to take the boring approach. 

Do You Know If Your Financial Advisor Is A Fiduciary?

If—after reading this article—you feel like your advisor is not a fiduciary, start looking for someone else right away. Shop around the local area and ask questions until you’re confident you’ve found a skilled fiduciary you can trust with your financial future.

If you are looking for a full-service wealth management firm in the San Francisco Bay Area that is taking a mindful approach to personal financial planning, give DeYoe Wealth Management a call. We are in Berkeley, CA. If you’d like to DIY, but want a little digital support, please check out Happiness Dividend.