INVESTING | May 29, 2024

What is a Fiduciary and Why Does it Matter?

Maybe you’ve seen the commercials on TV or your social media feed. Financial services firms are differentiating themselves from their competition based on their fiduciary policy. The commercial goes like this, “We are different than the other guys. We are a fiduciary, which means we put the interests of our clients first. We win when our clients win.” But what does it mean to be a fiduciary, and why is it important?

Fiduciary Defined

You might think that a fiduciary is simply someone who manages your financial assets, like investments or insurance. However, the meaning of a fiduciary is more complex than merely an approach to asset management. The CFP Board’s Code of Ethics and Standards of Conduct defines the fiduciary duty of a CFP® professional as:

  • “Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm.
  • Avoid Conflict of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
  • Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.”

This definition is quite comprehensive and makes clear that all financial decisions made by the professional claiming to be a fiduciary must be made in the client’s best interest. In the case of a CFP® professional, they could lose their designation if found to be acting outside these ethical requirements.

Why Does It Matter?

In the financial services industry, many financial products sold have commission-based fees associated with buying and owning the product. For example, mutual funds can have management fees, transaction fees, and other advisory fees that add up to over 2-3% of the value of the client’s annual holdings. Life Insurance products can also carry significant fees, and some firms reward the selling agent with the first year’s premiums of a policy. With this type of fee structure, a financial services professional could be incentivized to sell products to clients based on their fees rather than being appropriate for a client’s financial situation.

Fee-Based Structure Explained

There are several different types of fee structures that help ensure a financial professional’s interests are never placed higher than the client’s. The most common is “fee-based” compensation. Fee-based compensation means that a financial professional has a set and agreed fee structure for the services they provide. This fee structure may be in the form of an annual retainer that secures the professional’s services throughout the year or may be structured on a per-visit or per-hour basis. By directly linking the service provided with the professional’s compensation, you better align their interests with the client. Excellent service will be rewarded by more business for the professional.

Certified Kingdom Advisor

While a fiduciary is obligated to put the interests of their clients ahead of their own interests, this doesn’t mean that the financial professional is offering good or sound advice, or even that the advisor’s values are aligned with your values. When seeking the help of a financial professional, do your due diligence and make sure that the professional’s track record is solid and their values align with yours. One approach to help narrow the search for a financial advisor is the Certified Kingdom Advisors (CKA) designation. A CKA not only complies with the ethical rigors of a fiduciary, but they also are trained to provide sound, biblical financial advice. In this way, you can be confident the financial and investment decisions align with your Christian faith.

For more information, you can search for a financial advisor on the Kingdom Advisors website.

Image used with permission.

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You were meant for more. Your money was meant for more. You and your money are meant for an exciting, adventurous, and satisfying purpose. You were designed to live and give generously. And deep inside you know this and want this.

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