Fiduciary Duty: Definition, Why It Matters for Financial Advisors
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What is a fiduciary?
A fiduciary is an individual or organization that manages money and has a legal duty to act in the best financial interests of someone else. Fiduciaries have a bond of trust with clients and must avoid conflicts of interest.
Fiduciary relationships are not governed by one specific law. The exact duties a fiduciary is beholden to will depend on their profession and any laws or regulations surrounding their role. Board members may have certain fiduciary duties to their companies, trustees owe fiduciary duties to their beneficiaries, and retirement plan administrators typically have a fiduciary duty to their company’s employees.
Examples of fiduciary duty can include a duty of care, loyalty, good faith, confidentiality, disclosure, and prudence.
Fiduciary financial advisors
A fiduciary financial advisor must only recommend investments and other financial planning products that are the best fit for their clients, following certain rules and regulations. Only some types of financial advisors, such as certified financial planners and registered investment advisors, are bound by fiduciary duties.
Some financial advisors can act in a fiduciary capacity, but be careful — this does not mean that all advisors are fiduciaries. A financial advisor who isn’t a fiduciary may recommend products for which they receive a commission or other form of payment.
For example, a broker-dealer is a broader term used to describe a person or firm that buys and sells securities on behalf of a client as well as for themselves or their organization. They aren't uniformly governed by a fiduciary duty, though under particular circumstances (such as state law), some may be held to a fiduciary standard.
» Looking for an advisor? Check out our list of the best financial advisors.
Fiduciary duty vs. suitability standard
The main difference between a fiduciary duty and the suitability standard is that fiduciary duty means an advisor must act in the best interest of their clients. The suitability standard means a broker-dealer must have a reasonable belief that an investment, transaction or the frequency of transactions is suitable for the customer.
The Investment Advisers Act of 1940 states that an investment advisor (or anyone in the business of giving investment advice) has a fiduciary duty to their client. The act itself calls these measures broad and doesn't provide specific regulations beyond requiring that advisors act in the best interest of a client.
The suitability standard is set by the Financial Industry Regulatory Authority (FINRA). The “reasonable belief” in the suitability standard leaves room for broker-dealers to recommend products that will increase their bottom line through commissions but may not necessarily be the best investment for you.
Registered investment advisors are legally fiduciaries, but broker-dealers and other types of money managers are not. Some financial advisors, such as certified financial planners, may also be fiduciaries.
If your financial advisor doesn't have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission over ones that would be the best fit for you, which could cost you more. Fiduciaries, on the other hand, must act in your best interest. That's why it's considered better to work with a fiduciary rather than an advisor who is simply following the suitability standard.
How do I know if I'm working with a fiduciary financial advisor?
There are many different types of financial advisors, and beyond that, several certifications and licenses those advisors can hold. Few titles beyond investment advisor and broker-dealer are regulated at all, including common titles like “wealth advisor” and “financial advisor,” so it’s especially important to vet any potential advisors before committing to one.
The easiest way to verify that a potential advisor is a fiduciary financial advisor is to simply ask and then verify their status.
To check that they’re registered with the SEC, use FINRA’s BrokerCheck database. If you’re working with an investment advisor firm, you can also check for an advisor’s Form ADV on the SEC’s IAPD page, which catalogs their registration with the SEC or state, along with disclosures about the firm, the firm’s business operations, and any misconduct the firm or advisor may have been involved in.
Another way to ensure your advisor is a fiduciary is to work with a certified financial planner — a highly trained specialist with significant financial education and experience. The CFP code of ethics states that all CFPs “must act as a fiduciary, and therefore, act in the best interest of the client.” So if you see the CFP designation, you know you’re in good hands. You can verify a CFP through the CFP Board’s website.
» Not sure how to choose? Read our guide on how to choose a financial advisor.
How much does a fiduciary financial advisor cost?
Financial advisors have different ways of charging for their services. Some charge a flat fee, typically in the range of $2,000 to $7,500 per year, while others charge a percentage of the client’s assets.
» Learn more about how much financial advisors cost.
Is a robo-advisor a fiduciary?
Robo-advisors use computer algorithms to build and manage an investment portfolio for you based on personal factors, such as risk tolerance. Many robo-advisors are registered as investment advisors with the Securities and Exchange Commission and have a fiduciary duty to their clients. However, many robo-advisors have a limited understanding of clients, which may mean they’re unable to help with broad financial planning guidance, such as debt management. Robo-advisors are often less expensive than human advisors, but critics of robo-advisors often cite their limitations as enough to disqualify them as fiduciaries.
If you’re looking solely for investment management, many robo-advisors offer that in the capacity of a fiduciary. However, most won’t be able to take your full financial picture into account the way a traditional financial planner might.
» Ready to get started? Here’s our roundup of the best robo-advisors.