We’ve commented in previous articles that too often people spend the majority of their time on earning money and little to no time on how to manage their money. (See our blog titled “The Biggest Money Mistake You Can Make”, posted in November, 2009.) If you are not familiar with the word “fiduciary” you need to understand it and use it as a guidepost for choosing your investment advisor.

According to Wikipedia, “A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties. A fiduciary duty is the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (the 'principal'): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents." If your financial advisor is acting as a fiduciary, he is acting in your best interest. If he or she is acting in a fiduciary capacity as your advisor, he (she) will clearly disclose all means of compensation and any potential conflicts of interest.

Clearly, it makes sense to seek out an advisor who will act as your fiduciary when helping you invest your hard-earned money. You need your advisor to put your interests first and his or her’s, second. When searching for an advisor, you need to find out how a prospective advisor is compensated and what relationships they have with others. We believe that advisors who sell products have a higher hurdle to get over to prove they meet the fiduciary requirement. Fee-based advisors who are compensated based on a percent of assets managed and not via commissions would certainly seem preferable to commissions-based advisors. However, being fee-based doesn’t guarantee the advisor will act as a fiduciary.

In a recent article in the Wall Street Journal by Jason Zweig titled “Holding Brokers to a Higher Standard”, May 15, 2010, Mr. Zweig discusses the financial reform legislation being considered by Congress. At one point, according to the article, the proposed legislation contained a requirement that all “investment advisors” be held to a fiduciary standard.

Mr. Zweig reported that: “Many brokers and insurance agents are obligated only to have reasonable grounds for believing that any investment they recommend is ‘suitable’ for you. They need not inform you of conflicts of interest that might bias their judgment; you might never find out, say, that they sold you a particular fund primarily because it paid them a fatter commission than others would have.”

Currently, the bill has been changed from its original draft to only include a requirement to “study whether current standards are adequate”. It would behoove us all to encourage our senators and representatives to add the fiduciary requirement back into the reform bill. And, in your own best interest, check to see whether your investment advisor is acting as your fiduciary. Or, if you don’t have an advisor, place the fiduciary requirement at the top of your list of requirements when selecting one.