What Is a Fiduciary, and Why Does It Matter?
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A fiduciary is an advisor who must act in your best interest.
Many financial advisors are fiduciaries, but some are not. Be careful and vet any potential advisor.
If your advisor is not a fiduciary they may be able to recommend investments that pay them a commission.
If you've been confused about the distinction between a fiduciary and a financial advisor, you're not alone. Fiduciary financial professionals must follow certain rules and regulations — but it’s not always easy to tell if you’re working with one.
What is a fiduciary?
A fiduciary is an individual or organization who has a legal duty to act in the best interest of someone else. Fiduciaries have a bond of trust with clients and must avoid conflicts of interest. In finance, fiduciary financial advisors must only recommend investments and other financial planning products that are the best fit for their clients.
Who is a fiduciary, and what do they do?
A person or entity may be required to act as a fiduciary when certain responsibilities are assigned to them or if they hold a specific role within their profession. Generally speaking, fiduciary duties tend to come into play when a high level of trust is required.
For example, 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.
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. Examples of fiduciary duty can include a duty of care, loyalty, good faith, confidentiality, disclosure and prudence.
Fiduciary financial advisors
A fiduciary financial advisor manages their clients’ investments in a way that is aligned with the clients’ best interests. Some financial advisors can act in a fiduciary capacity, but be careful — this does not mean that all advisors are fiduciaries. Part of what makes this distinction so murky is the legislation surrounding investment and financial advice.
Fiduciary duty vs. suitability standard
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.
Broker-dealers, which 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, aren't uniformly governed by a fiduciary duty, though under particular circumstances (such as state law), some may be held to a fiduciary standard. Instead, broker-dealers must follow a suitability standard set by the Financial Industry Regulatory Authority, or FINRA, which means they must have a reasonable belief that an investment, transaction or the frequency of transactions is suitable for the customer.
This “reasonable belief” 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. Fiduciaries, on the other hand, must act in your best interest. That's why it's better to work with a fiduciary rather than an advisor who is simply following the suitability standard.
The bottom line
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.
» Looking for an advisor? Check out our list of the best fiduciary financial advisors
How do I know if I'm working with a fiduciary financial?
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? Here are 10 questions to ask a financial advisor
How much does a fiduciary financial advisor cost?
You should use only financial advisors who are also fiduciaries, such as certified financial planners. Financial advisors have different ways of charging. 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, often from 0.25% to 1% per year. 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. Critics of robo-advisors often cite their limitations as enough to disqualify them as fiduciaries.
» Need to back up? What is a robo-advisor?
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 advisor might.
» Ready to get started? Here’s our roundup of the best robo-advisors