As your small business increases in size and success, you will undoubtedly bring in support in the form of advisors and consultants to guide some of your most complicated decisions. But knowing what to expect from a fiduciary advisor and how to take full advantage of their services may be key to your company’s financial success.
What is a Fiduciary Advisor
The term “fiduciary” is a legal term that can apply to any person who holds money or assets for the benefit of someone else, within a relationship of trust and confidence. A fiduciary advisor acts on that relationship, providing guidance. In a business context, a fiduciary relationship is part of a formal business relationship. However, you may also take advice from colleagues, mentors, and others outside of that formality. Understanding the fiduciary advisor’s role is necessary to both hold your formal advisors accountable and distinguish between fiduciaries and well-meaning advisors.
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Common Types of Fiduciary Advisors for Small Business Owners
Fiduciary advisors can fill a variety of roles, both in a business owners’ in their business capacities:
- Escrow agents in real estate holdings and transactions
- Brokers
- Board members
- Officers
- Financial and wealth managers
- Attorneys
- Accountants and bookkeepers
- Insurance agents
- Financial planners
While the specific roles of these various fiduciary advisors can and should vary, they all owe the business owner they are working with certain fiduciary duties because of their roles.
Differences Between Fiduciary Advisors and Other Advisors
However, it is important to note that in some of these categories, not everyone who works in a specific industry is required to be a fiduciary. For example, if you obtain insurance directly from a company rather than working through an insurance broker who reviews policies from a variety of providers, your insurance agent may be working for the company’s interests, instead of your own.
It wasn’t until 2020 that regulations from the Securities and Exchange Commission (SEC) held broker-dealers and investment professionals to the standards for fiduciaries. Even now, not all financial advisors are automatically fiduciaries. Instead, the regulations only apply to brokers and people who make investment recommendations. That means before you enter into a professional relationship with people who will be making recommendations for your company, you should ensure that they intend, or even are legally bound to act as a fiduciary.
Fiduciary Duties Explained
Fiduciary advisors are supposed to be the trusted advisors you can come to for guidance and advice about the complicated aspects of running a business such as law, insurance, or finances. Every fiduciary advisor owes their charges a variety of duties that fit in one of two categories:
- Duty of Care. A fiduciary advisor must take professional care to review all available information and any reasonable investigations before making recommendations for the future of your business.
- Duty of Loyalty. Your fiduciary agent is supposed to be loyal to you and your business, and avoid making recommendations based on their own self interest, including earning commissions.
In essence, the fiduciary advisor’s job is to:
- Act with integrity and ethics
- Working up to their professional standards
- Handling clients’ finances honestly
- Being truthful in accounting and reporting
- Placing the business and business owner’s interests above their own
- Avoiding or disclosing any conflicts of interests (including commissions or profits)
How to Hold Fiduciaries to Their Duties
It can be easy to lose track of your advisor’s fiduciary obligations as your relationship evolves. As a business owner, you need to make sure you are keeping an eye out for questionable conduct. You should be requesting information about the basis for fiduciary advisors’ recommendations. While you don’t need to be brutal about your inquiries, you should be firm and follow up on your requests. Remember that secrecy can be a sign that the advisor is not living up to their fiduciary duties.
In addition, it is a good idea to periodically review the relationship, and their compensation structure, for potential conflicts of interest. When you have a good relationship with your fiduciary advisor, you will undoubtedly want them to be well compensated for the advice and services they provide. However, you need to be aware whether that compensation depends on the type and cost of services they offer. Periodically request updated information about their compensation and any conflicts they may have, to ensure that they are acting for your best interests, rather than to earn larger profits for themselves or their company.
Ethics and integrity are an important part of any fiduciary relationship. However, all too often they go unspoken, or even fall by the wayside. If you suspect that your financial advisor, insurance provider, or other fiduciary advisor is no longer fulfilling their fiduciary duties, you will need to investigate, call them to account, and if no resolution can be found, ultimately end the relationship. But by taking care to hold your fiduciary advisors accountable for their duties, you can ensure that your business’s best interest is at the heart of any recommendations you receive.
David Stanislaw is an organizational development specialist with over 25 years’ experience in improving processes in the workplace. Through business consulting and facilitation, David helps businesses and teams improve productivity and minimize downtime. Contact us to meet with David to move toward high organizational functioning today.
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