How to Become a Fiduciary?

There’s no doubt that money can make many problems go away. As long as you have enough, you can live a life free of financial stress and worry.

But how do you reach such a level of confidence? How do you know nothing terrible will happen to your money?

Generating wealth takes time. And as you increase your fortune, it becomes more expensive to make mistakes. For these reasons, people hire financial advisors:

  • They help you navigate through financial complexity
  • They lower the risk of you making a mistake. You don’t want to put all your retirement savings at risk because of one bad decision
  • They manage your money so you don’t have to. Because you should be out there focused on making money (or retire), not worrying about the amount you currently have
  • Advisors also offer financial education, tax planning, budgeting, debt management, and insurance advisory

In short, they allow you not to worry about money. And if you wonder “Well, could I just do that myself?” The answer is dissociation.

Have you ever wondered why it’s so easy to give others advice and so hard to apply it oneself? Because when a decision affects your life, you experience the consequences first-hand. Which makes us more emotional and less logical.

Sure, anybody can give you brilliant advice: worry less, eat healthy, exercise, learn this, don’t do that. But you’re the one who ultimately makes the decision, which is a responsibility others don’t understand.

The difference is, in finance, the advisor can indeed make the decision for you. And it will most likely be a good one because they’re not attached to it emotionally.

At least, as long as they are a fiduciary.

What Is A Financial Fiduciary Advisor?

What Is A Financial Fiduciary Advisor

Wait, don’t you know what that means?

That’s not a surprise. Out of the hundreds of thousands of advisors in the US, only less than 3,000 are fiduciary advisors. It’s so rare there’s no way you’d know they exist unless someone told you.

What makes them so special? Well, they receive total control of your funds and assets. Because they are legally required to work in your best interests.

It means that if you want something and they find something much better, they must offer you the best service they know.

Here’s the million-dollar question: How do you know they’re telling the truth? That’s what we’ll try to answer in this article: how advisors become fiduciaries, what the benefits are, and how does it affect YOU.

It may first sound very common to you. What do you mean by working for my best interest? Aren’t all advisors supposed to do that?

They’re supposed to do so, but almost none of them do. As long as there’s something to sell, they want you to buy it, whether you need it or not.

But a fiduciary will only advise you what’s best for you. If you want a better example, picture this example: Who would you ask for health advice, a butcher, or a dietitian?

As for fiduciary advisors, the pros and cons are evident:

You are receiving expert financial help, meaning the person will manage the funds the best way they know, as if it were their own money. You just need to make sure the advisor matches your investing goals, approach, and personality.

The problem with trust positions is, it’s the perfect setup for financial fraud, especially when working with inexperienced clients. Because of the level of trust, it’s tempting even for brokers to use this title falsely along with other confidence tricks.

You can always check for certifications that verify their fiduciary role. Although that’s somewhat reliable, it does NOT guarantee the advisor will operate that way.

For example, you may be interviewing a part-time fiduciary. That essentially means they only help you when they see it convenient. It’s like saying you’re going to tell the truth only 50% of the time. But when? Nobody knows.

Fiduciary advisory it’s not just another service. It’s the contrary of incentivized brokerage, which is why they can’t go together. To find out if they’re telling the truth, you have to talk to the advisor in person and make the right questions.

Examples Of Fiduciary Positions

Examples Of Fiduciary Positions

For a fiduciary, the money isn’t in the products. Their selling point is their goodwill, and the best specialists will only profit from service fees. Here are some common fiduciary positions:

  • Trustee of a will: After the beneficiary passes away, the trustee (the fund manager or advisor) commits to use the funds as intended in the declaration. They’re responsible for distributing the funds to inheritors, for example.
  • Lawyers: These professionals typically have nothing to charge you for other than the legal protection service. They’re required to use the law the way that benefits you the most.
  • Estate executors: These must manage your real estate according to your wishes and cannot favor themselves when you pass away. In that case, fiduciaries are still responsible for your heirs if that’s how you agreed.
  • Corporate directors: It’s in their best interest to make the company as profitable as possible. As long as the company is competitive, shareholders can be sure the team will try everything possible to increase their valuation.

Sometimes, corporations may use shareholder’s funds as a risky strategy to grow faster. For example, they can lie about their numbers to attract more investors, then use those funds to correct their debt or keep operating. Unethical strategies don’t end up very well, so we recommend you learn more about accounting fraud here.

  • Real estate agents: Anybody who hires a realtor knows they’re paying them something, but how much exactly? Do you think they’re taking advantage of you? You think: “Darn. Had I found this property and negotiated on my own, I’d have saved $20,000.” So you want the realtor to disclose exactly how much they’re making from the deal. Then, you decide if everything they’ve done to help you justifies that price.

How To Become A Fiduciary Officially

How To Become A Fiduciary Officially

The legal requirements can get very complex, which also depend on your state’s regulations. We’re going to sweep the surface of those conditions. But you can find all the accurate details in this file.

To become a fiduciary advisor, you will likely need:

  • A financial license
  • An IARD account to manage client funds
  • A position on an accredited firm (unless you work independently)

There are also strict legal requirements you can’t skip, such as:

  • Being at least 21 years old
  • Having a bachelor’s degree, a college degree (Arts & Sciences), or five years of relevant experience as a professional fiduciary

That sounds a bit catch-22. How are you going to have professional experience without the license? Well, you don’t need to register officially to start working with clients, although it’s true most will prefer you have some background.

If you don’t know where to start, consider the internships offered by some financial firms.

You also need to pass exams for the specific role you want to take (The CFP, Certified Financial Planner, is the most popular). Then, you pay around ~$400 to submit the application.

You can find the whole process described on the Government website of your state (e.g.,fiduciary.ca.gov).

The good news is, you’re exempt from licensing if you work:

  • As an attorney
  • As an investment advisor
  • As an employee of an institution insured by the FDIC
  • As an employee of a corporation regulated by the SEC

And once the Government recognizes your fiduciary career, you’re ready to get out there and work with clients.

How To Make Money As A Fiduciary

How To Make Money As A Fiduciary

Let’s start with the main question: Why should anyone trust you?

Well, your selling point is financial trust. More than half of Americans think financial advisers work for their best interest when they’re really taking advantage of them.

And the few ones who are aware of this are more skeptical. A license will certainly help, but getting the client’s trust isn’t as simple as saying: “Yes, I’m a fiduciary advisor. Trust me!”

Mind that responsible clients will make tricky questions to expose the truth. And not only do they want the right answers. They’re also looking for someone they enjoy working with.

We’ll go through the most common questions they make and how to prepare for it. But the first principle is to offer value upfront: information in particular.

Offer to guide your potential clients, show them what options they have and what’s best for them. You can offer these strategy sessions either in person or with video-calls. Of course, you’d like them to hire you, but even if they don’t, they just got a one-hour consulting session for free, which is valuable.

You’re much more likely to get clients when you educate them with your sincere advice.

Now, here’s what clients want to know about you…

What services do you specialize in?

Complex finance can quickly become abstract. So even though your clients need an advisor, it helps them if you picture the benefit. What can you do to improve their financial future? If you give a generic answer, they’ll think: “He’s just another financial manager. I can do that myself.”

Do talk about everything you know. The more you show them, the more you increase your perceived value. Do you specialize in…

  • Preparing college tuitions?
  • Preparing tax returns?
  • Negotiating and managing debt?
  • Offering comprehensive life insurance?
  • Managing a variety of investment types your clients may not be familiar with?
  • Saving for retirement?

Maybe you don’t offer anything special, but you’re really good at understanding finance. You might have the ability to explain complex terms in simple words to educate your clients, which makes you very valuable.

How do you make money?

Clients know you’re offering advisory services for money. But they’re looking for someone who only charges for their service. That means you pay a fee for their advice and management. And if they do have something to offer you, fiduciaries should disclose it upfront.

Back to the dietitian example, imagine I pay them to sell you an unhealthy product full of sugar and unhealthy chemicals. I say: “for every sale you make, I’ll pay you $100.” Guess what’s going to happen.

That’s what we want to avoid. When your only selling point is financial trust, you can’t sacrifice it for profits. Clients don’t hire you because of the products, not even to make money. They need someone they can trust and ask for help.

Your fiduciary may charge 0.5% to 1% of your investment gains, starting from a fixed one-time fee. The percentage means that if you don’t make money, neither will they. Or at least, they won’t make much.

How often will we communicate, and how?

It’s, of course, comfortable to guide your clients with some sort of guide. But if you do that, the client may feel the buyer’s resentment: “I could have done this myself, but instead I paid thousands for someone to do it.”

Clients appreciate that you dedicate your time for their problems. That means you’re offering a personalized service, which could be via quarterly video-calls or in-person meetings.

It doesn’t take much to communicate more frequently, and investors will really appreciate it. For example, you could offer them a weekly newsletter. So you report their numbers along with your market research based on the latest news.

Or perhaps you offer a one-hour Q&A call every week.

Who has worked with you? Has any client left you, and why?

Financial advisory isn’t very demanding because you do most of the work upfront. But it still requires some time. The goal of a financial advisor is to find as many clients as possible to fill their hours with meaningful work.

If they spend their time calling prospects and promoting themselves, that means they may not have many clients, or they don’t have much experience. The best advisors are typically too busy to find clients. Instead, clients find them.

The moment you interview a potential advisor, you should request testimonials. And don’t just ask about the case studies. Ask them to tell you about the clients who stopped working with them and why.

That might be the reason they’re looking for clients right now. And it may be why you should or should not work with them. If they say “our clients never left us,” that sounds unrealistic. They probably didn’t work with many or they told you a lie.

It’s okay to have rejections because not every advisor fits every client. Simply ask this to see if you detect some red flags.

What do your clients like the most?

What a question. Less than 0.5% of advisors are actual fiduciaries, which makes that a selling point itself. Anyway, you want to mention a benefit that only you can offer.

When clients think of you, what’s the first benefit that comes to their mind? That’s your selling point: the reason people like working with you, even when others do it for cheaper.

  • Do you have thousands of success stories?
  • Do you offer lots of valuable insights before they even pay you?
  • Do your clients enjoy how fast you reply to your messages?

A brief selling point is more convincing than a complex one.

Now, some may say they’re special because of certain investment funds that only they can access. We’re not trying to dash your hopes, but those secret tactics are likely a lie. They may try to sell you a financial product for a commission.

What conflicts of interest should we be aware of?

We know asking this is as futile as saying: “Are you a fiduciary or not?”

But at least, this question is more specific. Here’s where the fiduciary needs to disclose how they make money, and what the client should expect.

They want to know what they’re going to earn after applying fees and taxes. Also, make clear what services are included and their term.

Most advisors have contracts that renew every year by default, but you can uncommit anytime you want.

What’s your investing philosophy?

What makes an advisor better than another? It’s not the price, what they sell, nor even what they know about the markets. It’s how they approach investing.

Would you say we all have the same financial goals? Compare:

  • A single mom who wants to save up for her kids’ college
  • A Fortune-500 CEO trying to attract investors
  • An intern with no work experience who needs to get out of student debt
  • A 65-year-old couple who wants to retire and not worry about money

Each of these people would take a different approach to their finances. Also, the strategies you choose will depend on your risk-reward personality. No tactic is better than another.

Now, you may think the best way to achieve this is to tell advisors how you work. But there’s a catch: if you talk first, incentivized advisors will likely say: “Yes, we can do that.”

Listen first, talk second. Ask them about their financial goals, how they manage other client’s money, and what is their risk-reward tolerance. Then, you talk about yourself. If they say they can adapt, you decide whether they can be your fit or not:

  • How do you diversify across the many investment types?
  • How do you qualify the right securities, based on long-term value or the immediate growth in the market?
  • What do you think about timing/outperforming the market?

But before you place your assets in the account, you might want to decide between revocable and irrevocable trusts.

Irrevocable Trust Advantages And Disadvantages

Irrevocable Trust Advantages And Disadvantages

We use the term “irrevocable” to limit who can modify the trust conditions. By default, there are three parties involved:

  • The creator of the trust/ settlor
  • The trustee or advisor
  • The beneficiary or trustor

It doesn’t mean nobody can change it. The trustor can modify it under rare situations, but that’s not the purpose of this trust. People use it to protect assets from lawsuits and property taxes.

Let’s look at the pros and cons:

PRO: Asset Protection

Irrevocable trusts remove the assets from the benefactor’s taxable estate. They’re no longer responsible for property tax upon death not even for the income generated from those assets.

CON: Lack of control

Although you can change things, it’s not as simple as signing a document. If your needs change and the situation no longer benefits you, you can’t modify it freely without a third party.

For example, while you can collect the income generated from those assets, you can’t sell them under this agreement. In hard financial conditions, that lowers your cash-flow.

These trusts prevent the court from changing the trust conditions. If you lose a lawsuit, the court can force you to change the trust beneficiary to your financial enemies. When the trust is irrevocable, that doesn’t happen.

CON: Protection eligibility

But courts still need to support fair judgments. And it’s easy to take advantage of this trust when you’re expecting someone to sue you.

That’s why most states require you to establish the irrevocable trust one to two years before the lawsuit. If your assets haven’t stayed in the trust the required time, the court can still control your assets.

Probably not what you want.

PRO: A Variety Of Financial Benefits

  • When you die, you can avoid paying estate taxes with an irrevocable life insurance trust.
  • You can also pass the fortune onto your family with grantor retained annuity trusts, which are gift-tax exempt.

CON: Irreversible

You have to be 100% certain of your decision because you can’t undo mistakes. Irrevocable trusts prevent others from using the funds in a way that wasn’t intended in the agreement.

So if you deposit a large amount but change your mind years later, you’re out of luck.

The Bottom Line

If you’re looking for a fiduciary advisor, you already made a great step towards your financial future. If you’re wondering which one to hire, remember that whoever shares the most information is likely trying to help you.

Many use the fiduciary title, yet only a few truly deliver. It helps if you can meet these professionals via referrals, as long as those referrals have achieved the financial goals you want. Otherwise, you might be paying for something you didn’t want.

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