Discussing the differences between advisors who are fiduciaries and those who are not can be confusing. Fiduciary advisors are required by law to act in the best interests of the client. They are mandated to operate using a fiduciary standard. Fiduciary advisors must publicly disclose any possible conflicts of interest.
Not all advisors are fiduciaries. Many brokers/dealers are not fiduciaries. Advisors who are not fiduciaries operate under a suitability standard. Their recommendations do not need to be in the client’s best interest. They only need to be “suitable.” These advisors are not obligated to disclose their conflicts of interest.
Methods of Compensation and Conflicts of Interest
A fiduciary financial advisor in Minneapolis MN, is compensated solely by the fees charged to clients. These fees can be based on a flat fee, a percentage of the AUM (assets under management), or an hourly rate. A fiduciary advisor does not sell products or receive any commissions.
Brokers/dealers also charge fees, but in addition, they may receive commissions on the products they sell. It is easy to see how brokers may wish to sell the client a particular product, even if it is not in the client’s best interest, so they can earn a sales commission or make a sales goal. The recommendations provided by brokers/dealers may be influenced by earning commissions and other sales incentives.
Main Values of a Fiduciary Financial Advisor
There are three fundamental fiduciary obligations that a fiduciary financial advisor in Minneapolis, MN, must uphold. They are loyalty, care, and obedience.
The first value is loyalty. Loyalty requires that the fiduciary advisor serve the beneficiary’s best interest, act in good faith, and manage all conflicts of interest.
The second value is care. The fiduciary advisor must act with skill, diligence, and prudence. The advisor must also demonstrate and document a sound decision-making process. The third value is obedience. The fiduciary advisor must be knowledgeable and adhere to all applicable laws and regulations.
