Fiduciary vs Financial Advisor: What’s the Difference?

What’s the difference between a fiduciary and a financial advisor?

First, the two terms aren’t mutually exclusive. A fiduciary can be a financial advisor, but not all financial advisors are fiduciaries.

A fiduciary advisor puts your needs first by upholding the fiduciary standard. They’ll disclose any potential conflicts of interest and make recommendations based on what’s best for you, not their financial gain.

We recommend choosing a fiduciary advisor because they are required to act in good faith, but choosing between a fiduciary and any financial advisor can depend on your needs and circumstances.

In this article, we’ll delve deeper into these two roles and how they can impact your financial journey.

Fiduciary vs. Financial Advisor: Key Differences

Financial planning and investment management are crucial to achieving your long-term financial goals. When seeking professional assistance in managing your money, it’s important to understand the differences between a financial advisor and a fiduciary.

In this section, we will define each, explain the fiduciary duty, and discuss the ethics of disclosing conflicts of interest.

Financial Advisor Definition

A financial advisor can be a financial professional or firm that assists and advises you on financial matters. They help you define your financial goals, develop a financial plan, and provide recommendations that help you achieve those goals.

Financial advisors can offer guidance on a wide range of topics, such as investment strategies, tax planning, risk tolerance, estate planning, and retirement planning.

It is important to note that anyone––even non-fiduciary advisors––can call themselves a financial advisor without specific training or qualifications. Therefore, finding someone with the proper certifications and expertise is crucial when seeking an advisor.

Types of Financial Advisors

There are various types of financial advisors, each specializing in different areas of financial planning and personal finance. Some common types of financial advisors include:

• Certified Financial Planner (CFP): CFPs have completed extensive training, including over 4,000 hours of education and passing a comprehensive exam. They must also continue their education to maintain their certification. CFPs are well-versed in financial planning and can provide holistic advice.
• Chartered Financial Consultant and Chartered Financial Advisor (ChFC/CFA): ChFCs and CFAs are professionals who have completed a rigorous educational program focused on comprehensive financial planning. They have insurance, estate planning, retirement planning, and investment strategies expertise.
• Retirement Income Certified Professional (RICP): RICPs specialize in retirement planning and help clients develop strategies to ensure a secure retirement income. They have in-depth knowledge of Social Security, pensions, annuities, and other retirement income sources.
• Certified Private Wealth Advisor (CPWA): CPWA are highly educated and specialized financial planners who have met stringent requirements to advise high-net-worth clients on wealth management strategies.
• Broker-dealers: Broker-dealers can be individuals or companies that buy and sell securities for their clients and for themselves. Broker-dealers aren’t fiduciaries and they are likely to have conflicts of interest because they trade for themselves.
• Asset managers: Asset managers monitor, buy, and sell investments and assets to increase and maintain their clients’ net worth.
• Robo-Advisor: Robo-Advisors are algorithm-supported software that provides personalized and cost-effective advice.
• Investment adviser: Investment advisors limit their scope to managing investments. They’ll assess your investment portfolio and make recommendations based on past performance and forecasts.

In general, credentialed financial advisors are more likely to uphold the fiduciary standard, but it’s not a hard and fast rule. There are endless financial designations, so this list is far from exhaustive.

Importance of Certifications and Expertise

When choosing a financial advisor, it is crucial to consider their certifications and expertise. Certifications such as CFP, ChFC, and RICP demonstrate that the advisor has undergone rigorous training and has met specific professional standards.

These certifications ensure that the advisor has the knowledge and skills to guide you in your financial planning journey.

Additionally, their expertise in specific areas of financial planning can be beneficial when seeking advice tailored to your unique needs.

By understanding the different types of advisors and their qualifications, you can make an informed decision when selecting a financial advisor to help you navigate your financial journey.

For example, if you are approaching retirement, working with a retirement income specialist can help ensure that your retirement savings are effectively managed and provide a steady income during your retirement years.

Choosing an advisor with the certifications and expertise that align with your expectations ensures you receive sound financial advice tailored to your goals and needs.

Fiduciary Definition

A fiduciary is a financial advisor who operates under a fiduciary duty, which is a strict code of ethics. They are legally bound to act in their client’s best interests when providing financial advice and making investment recommendations. Fiduciaries are obligated to prioritize your needs and goals above their own.

Fiduciary duty encompasses a set of ethical and legal obligations that financial advisors must follow. These obligations include:

• Standard of Care: Fiduciaries must make informed and prudent investment decisions on behalf of their clients. They conduct thorough research, assess risks, and provide recommendations that align with their client’s objectives.
• Duty of Loyalty: Fiduciaries must prioritize their clients’ interests and avoid conflicts that could compromise their objectivity. They should disclose any potential conflicts and act transparently.

Conflicts of Interest and Disclosure

Conflicts of interest can arise when financial advisors have incentives or obligations that may influence their recommendations.

For example, some advisors receive commissions or bonuses for selling certain financial products, which may not always be in the best interest of their clients. It’s crucial to be aware of these conflicts and understand how they may impact the advice you receive.

Fiduciaries are required to disclose any conflicts of interest to their clients. This transparency ensures you have all the relevant information to make informed investment decisions.

By choosing a fiduciary, you can have confidence that your advisor is committed to acting in your best interest and minimizing any conflicts.

Remember to verify whether an advisor is a fiduciary before committing to their financial services. Many fiduciaries advertise themselves as fee-only advisors, indicating that they solely earn fees from their clients and do not receive commissions from product sales.

Fiduciary vs. Financial Advisor: Cost Comparison

The cost difference between a fiduciary and a financial advisor can vary.

Financial advisors who operate under the suitability standard may charge lower fees upfront, as they have the potential to earn commissions from recommending certain products.

However, this can lead to higher expenses in the long run if those products are not the best fit for the client’s financial goals.

On the other hand, fiduciaries sometimes charge fees based on a percentage of the assets they manage, an hourly rate, or they may work on a flat fee structure.

While the upfront costs may be higher, fiduciaries are legally obligated to act in their client’s best interests and provide unbiased investment advice.

How to Determine if a Financial Advisor is a Fiduciary

When searching for a financial advisor to manage your money, one critical consideration is whether they are fiduciary. But what exactly does that mean, and how can you determine if a financial advisor is a fiduciary?

In this section, we will explore the ways to identify a fiduciary advisor, including advertising, fee-only advisors, and directories and credentials.

1. Advertising as a Fiduciary

A financial advisor who is a fiduciary will typically advertise this important distinction. They understand the significance of acting in their clients’ best interest and are proud to highlight their fiduciary status.

When researching potential advisors, look for explicit statements or mentions of fiduciary duty on their websites or marketing materials.

2. Fee-Only Financial Advisors

Another way to determine if a financial advisor is a fiduciary is by identifying if they are fee-only. Client fees strictly pay fee-only advisors and do not earn commissions or receive compensation from third parties.

This fee structure allows advisors to provide unbiased advice and recommendations. Almost all fee-only advisors are fiduciaries. Therefore, if an advisor advertises themselves as fee-only, it is highly likely that they are also fiduciaries.

3. Directories and Credentials for Fiduciary Advisors

There are valuable resources for finding and vetting fiduciary advisors in your area or online.

These directories list financial advisors who operate under a fiduciary duty and have met certain professional standards.

Some of the reputable directories include:

• National Association of Personal Financial Advisors (NAPFA): NAPFA is an organization of fee-only financial advisors committed to acting as fiduciaries. Their directory allows you to search for advisors based on location and specific areas of expertise.
• Garrett Planning Network: The Garrett Planning Network is a network of fee-only financial advisors who offer hourly, as-needed financial planning Their directory can help you find fiduciary advisors who provide personalized advice without requiring ongoing asset management.
• XY Planning Network: The XY Planning Network focuses on serving Gen X and Gen Y clients. Their directory allows you to search for fiduciary advisors who specialize in working with younger individuals and families.
• Alliance of Comprehensive Planners (ACP): The ACP is an association of fee-only financial advisors who provide holistic financial planning Their directory can help you find fiduciary advisors who comprehensively approach your financial well-being.
• Financial Industry Regulatory Authority (FINRA): FINRA’s BrokerCheck tool maintains a record of all registered financial advisors, their credentials, and any disciplinary actions taken against them.
• Securities and Exchange Commission (SEC): Like FINRA, the SEC Action Look Up tool keeps records of individuals who have been named as defendants in SEC court filings or administrative proceedings.

Additionally, it is beneficial to verify an advisor’s credentials. For instance, you can check a financial planner’s Certified Financial Planner (CFP) credentials on the CFP Board website.

The CFP Board ensures that the advisor has completed the required training and continues to meet ongoing education requirements.

Bottom Line

Understanding the difference between a fiduciary and a financial advisor is crucial when seeking professional guidance for managing your money. While anyone can call themselves a financial advisor, finding candidates with the right certifications and expertise is important.

In general, we recommend prioritizing fiduciary financial advisors because their recommendations are most likely to be unbiased and acting in good faith.

To ensure that you are working with a fiduciary, look for advisors who advertise themselves as such or as fee-only financial advisors. Fee-only advisors typically act as fiduciaries. You can also verify an advisor’s credentials through directories.

With this understanding, you can make an informed decision and enlist the help of a professional who will act in your best interests when managing your finances and investments.