What Is A Fiduciary?

When it comes to hiring a financial advisor, there’s one term you need to understand—fiduciary.

“Financial advisor” is a broad title, and not all financial professionals are held to the same standards when they manage your money and help you make financial decisions.

That’s why it’s key to work with a fiduciary who’s legally bound to act in your best interest. Today, we’ll unpack what standards fiduciaries are held to and help you identify a fiduciary to work with.

What is a Fiduciary?

A fiduciary is an individual advisor or an organization that is legally required to put their client’s interest ahead of their own.

To act in the best interest of their clients and build good faith, they agree to avoid potential conflicts of interest (or disclose any if they arise) and offer complete and accurate investment advice.

There are different types of fiduciary relationships in the financial services industry. For example, certified financial planners (CFPs) and registered investment advisors (RIAs) are held to fiduciary responsibilities, while some other types of financial advisors may be non-fiduciary.

What Is the Fiduciary Standard?

Trustees, retirement plan administrators, board members, lawyers, guardians, insurance companies, and insurance agents are all examples of fiduciaries.

With so many types of fiduciary relationships, there isn’t a comprehensive set of guidelines that defines the fiduciary standard. It can vary from one industry to the next.

For example, a corporate director or a board of directors can have a fiduciary duty to stockholders.  For these individuals, the fiduciary standard applies to decisions like choosing a new CEO, and it includes a duty of care, duty of good faith, and duty of loyalty.

Meanwhile, the fiduciary standard for financial advisors laid out in the Investment Advisers Act of 1940 broadly states that investment advisors must act in their client’s best interest and report conflicts of interest.

Fiduciary Duty vs Suitability Standard

Financial advisors who aren’t held to the fiduciary standard adhere to a looser suitability standard, which only requires them to make recommendations that are “suitable” or appropriate for their client’s situation.

While they’re required to offer advice that aligns with their client’s financial goals, it doesn’t necessarily have to be the best advice.

In the financial world, broker-dealers are generally held to a suitability standard rather than a fiduciary rule. That means they can buy and sell securities on behalf of another person and themselves, favoring investment decisions that earn them higher commissions as long as it isn’t detrimental to the client.

Some broker-dealers are held to the Regulation Best Interest, or Reg-BI Standard that was established by the U.S. Securities and Exchange Commission (SEC). The standard of care is far less stringent than the standards for fiduciary financial advisors.

As financial expert Michael Kitces explains,

“It applies to salespeople who are not fully in the business of advice, but it ups the standard a bit and says that when a broker gives a sales recommendation to someone, it really should be the right thing for them at the moment of the sale. Part of the challenge, though, is that the brokerage firm is not under any obligation to act in your best interest.”

While the Reg BI does provide a slightly higher standard for brokers to adhere to, it’s not on the same level as the fiduciary standard.

How to Determine If an Advisor Is a Fiduciary

When you’re looking for a financial advisor, here are three things you can do to ensure that they’re a fiduciary:

  1. Ask directly: The simplest strategy is to ask your prospective advisor if they’re a fiduciary. If the answer is yes, find out if they’re dually registered. If you want a financial planner who can sell you insurance, you may need to work with a hybrid advisor. Just be sure they’re open about their dual registration and how they’re compensated. If you’re at all uncomfortable with a hybrid advisor, work with a professional who’s a fiduciary at all times.
  2. Review their qualifications: Use BrokerCheck, a site run by FINRA, to see if your advisor is registered with a broker-dealer or a salesperson. If they are, they’re in the sales business and aren’t held to the fiduciary standard. If they’re a registered investment advisor, on the other hand, they do follow the fiduciary standard.
  3. Ask about compensation: If someone is a fee-only advisor, they’re paid directly by the client and cannot earn commissions, meaning they’re not incentivized to sell you certain products. They only collect an AUM (assets under management) fee, flat fee, or hourly fee. An investment advisor who is a fiduciary at all times is fee-only.

How to Find a Fiduciary

Here are a few resources to help you choose a reputable advisor who is held to a fiduciary standard:

If you got a referral from a friend or family member, you should still do your research before hiring them. Use BrokerCheck to find out if they’re a registered investment advisor, a broker, or both.


Why You Should Always Work with a Fiduciary

When it comes to hiring an advisor to help with your personal finances, you should choose a professional who’s going to keep your best interest in mind at all times.

You don’t want an advisor who may steer you toward certain products that will earn them higher commissions.

The only way to ensure you’re getting the highest quality financial advice specific to your situation is to hire a fiduciary.

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