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 federal or state laws or regulations related to their role. For example, board members may have certain fiduciary duties to their companies' shareholders. Trustees owe fiduciary duties to their beneficiaries. And retirement plan administrators typically have a fiduciary duty to the employees participating in their retirement plans.
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 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 person or firm that buys and sells securities on behalf of a client as well as for their organization. Under particular circumstances (such as state law), some may be held to a fiduciary standard. But they aren’t uniformly governed by fiduciary duty.
» Looking for an advisor? Check out our list of the best financial advisors
Fiduciary duty vs. suitability standard
The suitability standard sets a lower bar than a fiduciary duty. Let’s take a look at each.
The financial advisor fiduciary duty is set by the Investment Advisers Act of 1940. The act broadly defines that duty. It doesn't provide specific regulations beyond requiring that anyone in the business of giving investment advice must act in the best interest of a client.
The suitability standard is set by the Financial Industry Regulatory Authority (FINRA). It says a broker-dealer must have a reasonable belief that an investment is suitable for the customer. That leaves room for broker-dealers to recommend products that may not be the best for you.
In practice, that could look like recommending investments or products that pay a bigger commission over ones that would be the best fit for your financial situation. That's why it's usually better to work with a fiduciary than an advisor who is only 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 Securities and Exchange Commission (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 Investment Advisor Public Disclosure (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.
» MORE: 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.
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