What is a Fiduciary, and Why is it Important?

In today’s complex financial landscape, finding a trusted professional to manage your wealth and help you navigate crucial financial decisions is more important than ever. At the heart of this relationship lies the concept of a fiduciary.

What is a Fiduciary?

A fiduciary is an individual or organization trusted to act in the best interests of another person or entity. The fiduciary is expected to act with utmost good faith, honesty, and loyalty when handling the affairs or assets of the person they represent. They also help you avoid many investment mistakes!

Here are a few common examples of a fiduciary:

  • Financial advisors have a duty to provide sound financial advice and manage investments in the best interest of their clients. Registered investment advisors (RIAs) or certified financial planners (CFPs) are held to a higher fiduciary standard than commission-based advisors.
  • Trustees are responsible for managing assets held in a trust for the benefit of beneficiaries and must act in their best interests.
  • Fee-only fiduciaries offer financial advice for a fee. They are held to a higher fiduciary standard than a broker, requiring them to act in their client’s best interests at all times.

How Do Fiduciaries Differ From Commission-Based Advisors?

Commission-based brokers and financial advisors earn their income based on their sales and performance. They may push some products, services, or risky financial choices that are not the best fit for a client for the sake of their bottom line. They also do not have the legal pressure to work in their client’s best interest like a fiduciary does.

In contrast, fiduciaries tend to work on a fee structure, and they are held to a higher ethical standard. They must avoid conflicts of interest, maintain confidentiality, and act with care and diligence when performing their duties. Failure to fulfill these responsibilities can result in legal liability for the fiduciary.

Why are Fiduciaries Important to Wealth Management?

Fiduciaries promote responsible and client-focused practices. Their role is to maintain trust, protect the interests of clients, and ensure ethical and responsible decision-making. Some key reasons why fiduciaries are important in wealth management include

Acting in the Client’s Best Interest. Fiduciaries are legally and ethically obligated to prioritize the interests of their clients above their own. This helps ensure clients receive objective, unbiased advice and services tailored to their unique needs and goals.

Minimizing Conflicts of Interest. Fiduciaries are required to avoid or disclose potential conflicts of interest that may compromise their ability to act in the client’s best interest. This helps ensure that the advice and services provided are not influenced by personal or financial interests.

Protecting Vulnerable Parties. In cases where individuals are unable to make decisions for themselves, such as minors or those with special needs, fiduciaries play a vital role in safeguarding their interests and making decisions on their behalf.

Ensuring Accountability. Fiduciaries are held accountable for their actions by law and various ethical groups, and they can be held legally liable if they fail to fulfill their duties. Fiduciaries must be able to justify their actions and demonstrate that they have acted in the client’s best interest.

Overall, fiduciaries play an essential role in ensuring ethical and responsible practices. They protect the interests of clients and maintain trust in the wealth management industry.

RHP Puts Your Best Interests First

At RHP, our financial experts believe trust has to be earned. This is why we offer a transparent Client Relationships Summary, Disclosure Brochure, and the information you need to make informed decisions for your wealth. Do you need help with your trust or investment strategies? Start the conversation with us today.

Disclosure: You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.

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