Finding someone to help manage your money so you can meet your life goals can feel like a leap of faith. But there is a good way to weed out the trustworthy advisors from those who are more interested in their money than yours.
In its Ask the Expert series, Cashay reporters connect with experts on intimidating personal finance topics dealing with life's milestones, common money mistakes, and more.
Janna Herron talked with Charles Failla, a certified financial planner and principal of Sovereign Financial Group LLC. He's a New York-based advisor who specializes in all aspects of a person's financial life: goals, investments, taxes, liabilities, and, estate / legacy planning. Here’s his advice on the most important question to ask a potential financial advisor.
What is a fiduciary?
So a fiduciary is someone who has to do what's in your best interest. Simple as that, right? So if you think about it, if someone is not a fiduciary, then that means they don't necessarily have to do what's in your best interest. So my question would be why in the world would you entrust your life savings to someone who is not obliged to do what's in your best interest? So I think it's a very important concept.
Are all financial advisors fiduciaries?
It's amazing to me that there are people out there that are licensed to give "financial advice," although they're technically not, they're really selling things. And that really is in large part the difference. So there are people out there that are holding themselves out as "financial advisors," but they're not working as fiduciaries. They're working in large part as salespeople. They do have to sell something that's suitable and that's an important distinction — the difference between a fiduciary standard and a suitability [standard]. The fiduciary standard, I think is the gold standard, having to do what's in your best interest, that's all you need to say.
The suitability standard really starts getting, in my opinion, more convoluted. What is suitable? It's a broad definition and it's just a lot easier to just commit to doing what is best for the client, which is the fiduciary standard. So, not everyone that is a financial advisor is a fiduciary. It's important to ask and I would go so far as to recommend people to get that in writing.
How do I know if I'm working with someone who's a fiduciary?
Very simple. Number one ask: Are you a fiduciary? People sometimes I think might be shy to ask that, but they really put it straight out there. Are you a fiduciary?
The advisor says yes, great. Then say put that in writing for me that you are going to work with me as a fiduciary. Another thing to think about is you'll always work with me as a fiduciary now, what do I mean by that? There are some situations where a financial advisor works as a fiduciary and sometimes not.
So now what does that mean? On Mondays and Wednesdays, I'm a fiduciary, but Tuesdays and Thursdays, watch out anything can go. I mean, it's insane, but that is the situation right now.
How to I get it in writing?
The [Committee for the Fiduciary Standard] has something called the fiduciary pledge that people can literally just download, print out, and have people sign. [Here's a link to the fiduciary pledge.] You definitely should.
I tell you what, if they don't sign that, you're done. Just find someone else that will. It's that simple. And then you can start asking things like the more subjective parts of it: how experienced are you, checking references and all this other stuff. But I think the fiduciary question is the easiest one. It's binary. Yes, I am. No, I'm not. And then have them sign this pledge. That's all they need to do.
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