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. Fiduciary duties depend on the profession and any regulations surrounding the role. 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.
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 products that are the best fit for their clients. 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 incentive. For example, a broker-dealer is a person or firm that buys and sells securities on behalf of a client as well as for themselves or their organization. Under certain circumstances (such as state law), some may be held to a fiduciary standard. But not always.
» Looking for an advisor? Check out our list of the year's best financial advisors
Fiduciary duty vs. suitability standard
Instead, some financial professionals hold to a suitability standard. The suitability standard sets a lower bar than a fiduciary duty.
The financial advisor fiduciary duty standard is set by the Investment Advisers Act of 1940. It requires that anyone in the business of giving investment advice must act in the best interest of their 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 them a bigger commission. That's why it's usually better to work with a fiduciary than an advisor who is only following the suitability standard.
» Need help? Read our guide to choosing a financial advisor.
How do I know if I'm working with a fiduciary financial advisor?
There are many different types of financial advisors. And they may hold a variety of certifications and licenses. Few titles beyond investment advisor and broker-dealer are regulated at all. That includes common titles like “wealth advisor” and “financial advisor.” So it’s especially important to vet any potential advisors before committing to one.
First, ask any potential advisor if they're a fiduciary and verify their regulatory and professional status.
Next, see if the advisor is registered with the Securities and Exchange Commission (SEC), use FINRA’s BrokerCheck database. You can also read the advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure page. The form discloses useful information about the firm, its business operations and any misconduct.
Another way to ensure your advisor is a fiduciary is to see if they have a certified financial planner (CFP) designation. CFPs must fulfill significant financial education and experience requirements. And they're held to the CFP code of ethics, which includes acting as fiduciary. You also can verify a CFP through the CFP Board’s website.
How much does a fiduciary financial advisor cost?
Financial advisors have different ways of charging for their services. Some charge a flat fee. Others charge a percentage of the client’s assets.
Fee type | Commonly associated with | Typical cost |
|---|---|---|
Assets under management (AUM) | Managing your portfolio of stocks, bonds and other investments. | 0.25% to 0.50% annually for a robo-advisor; about 1% for a financial advisor. |
Flat annual fee (retainer) | Special projects, such as analyzing whether to buy or sell your business. May also provide more access to the advisor. In some cases, advisors may substitute flat fees for AUM fees. | Typically $2,500 to $9,200. |
Hourly fee | Special projects, such as helping create a financial plan for a specific situation, such as a divorce. | $200 to $400. |
Per-plan fee | Creating a detailed, written comprehensive financial plan for a client. | Typically $3,000, but varies by service. |
Transaction costs and expense ratios | Fees that trading platforms charge the advisor to use, or fees that mutual funds, ETFs and similar instruments charge. | Varies; expense ratios may range 0.05% to 0.75%. |
Custodial fees | Fees that the custodian charges you to hold your assets. | May be around 0.10% to 0.15%, but varies by account size, asset type, transaction activity and custodian. |
Bundles the firm’s investment management services and related custodial transaction costs together for one price. | Varies by account size and type. | |
Commission | Money earned from financial institutions for buying or selling certain products to clients. | 3% to 6% of investment transaction amount. |
To compile this information, we reviewed industry studies on average rates among financial advisors. Those studies included:
We also reviewed fees charged by providers reviewed by the NerdWallet investing team. | ||
» Learn more about how much financial advisors cost
Is a robo-advisor a fiduciary?
Many robo-advisors register as investment advisors with the Securities and Exchange Commission. That means they have a fiduciary duty to their clients.
Robo-advisors use computer algorithms to build and manage an investment portfolio for you, taking into account certain personal factors, such as risk tolerance. Often, a robo-advisor costs less than a human one. But they may have a limited understanding of clients. And most focus only on portfolio management rather than providing comprehensive financial planning and advice.
» Sound like a good fit? Here’s our roundup of the best robo-advisors.
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