- Fiduciaries are legally obligated to act in their client's best interests instead of their own.
- Many people feel more comfortable working with a financial advisor who is a fiduciary, but it depends on the circumstances.
- Breaches of fiduciary duty come with strict legal and/or professional penalties.
Understanding the ins and outs of investing and overall financial planning can be overwhelming, especially for those new to it. Is it worth investing in blue-chip stocks or cryptocurrencies? How can you best diversify your investing portfolio?
These types of questions may be best directed at fiduciary financial advisors, who have a legal and/or professional obligation to act with loyalty and care as they guide you through financial decisions.
Let's take a closer look at what makes someone a fiduciary, what a fiduciary duty means, what a fiduciary vs. non-fiduciary advisor looks like, and how to find a fiduciary you can trust with your money.
What is a fiduciary financial advisor?
The term financial advisor technically doesn't have any guardrails — anyone can call themselves one, regardless of their experience and certifications. However, if someone calls themselves a fiduciary financial advisor, that generally means they're bound to certain legal and/or professional standards that make them put your best interests first when working with you.
That said, there's still some wiggle room in the definition of a fiduciary financial advisor, but it generally means they have a greater obligation to act with loyalty and care toward you than a non-fiduciary financial advisor.
Definition of a fiduciary
A fiduciary is generally someone who is in a position of power or trust in a relationship and thus must act within certain legal or ethical standards. For example, a lawyer is generally a fiduciary who must act ethically toward you and maintain client confidentiality, or else they risk consequences like being disbarred.
In the world of financial advisors, a fiduciary is similarly someone acting in a position of trust who is bound to act with a duty of loyalty and care, as they are making recommendations in sensitive, important areas for clients, like providing investment and tax planning advice.
This duty may be a legal requirement, such as for Registered Investment Advisors (RIAs) who are acting under SEC regulations, or it might be a professional requirement, such as how a certified financial planner (CFP) must follow the CFP Board's Code of Ethics and Standards of Conduct to use the CFP designation, and this code includes acting as a fiduciary.
If they violate fiduciary duties, they could face consequences like fines, losing certifications, or losing their ability to practice as an SEC-registered advisor. Clients might even file lawsuits for breach of fiduciary duty.
Fiduciary duty
The difference between a fiduciary and fiduciary duty basically comes down to terminology. A fiduciary is a person or entity, e.g., a financial advisor, following certain rules or guidelines around acting with loyalty and care. These rules or guidelines they're following are what's known as their fiduciary duty.
Under SEC rules, for example, an advisor with a fiduciary duty to clients must always act in a client's best interests. The CFP Board's code arguably goes a step further by requiring CFP professionals to put clients' interests above their own.
Fiduciary duties tend to fall under two main categories, though the specifics can vary a bit based on the fiduciary standard an advisor is following:
- Duty of loyalty: This requires fiduciaries to act in a client's best interest and disclose or avoid potential conflicts of interest that may impact their ability to make good decisions.
- Duty of care: This holds fiduciaries to a high standard of care, requiring that they make decisions prudently and in good faith. This duty can either be implicitly stated or spelled out in a contract, but it essentially requires professionals to exercise good judgment and make informed decisions.
Types of fiduciary advisors
There are different types of fiduciary advisors, though generally when someone is acting as a fiduciary, that means they have a high standard of loyalty and care toward you.
One of the most common types of fiduciary advisors is an RIA, meaning they're registered with the SEC or state regulators. Generally, RIA registration applies to a financial advisory firm, and then extends to the advisors employed by the firm. These advisors often go by names like fee-only advisors or independent advisors, though you should confirm whether or not they're specifically an RIA and fiduciary.
Some financial certifications also require advisors to meet fiduciary standards, such as how CFPs must follow the CFP Board's code, which includes acting as a fiduciary that puts clients' best interests first. Others, such as the CFA designation, don't specifically require advisors to be fiduciaries but have a code that includes requiring members and candidates to have a duty of loyalty.
You can always ask advisors for clarification if you're unsure of their fiduciary status. If they're not transparent with you about this topic, then you might not want to work with them anyway.
How do fiduciary advisors differ from other financial advisors?
Not all financial advisors are fiduciaries. Broker-dealers, for example, might call themselves advisors, but they don't face the same strict requirements around acting in clients' best interests.
Fiduciary standard vs. Regulation BI
RIAs are regulated by the SEC's fiduciary standard, as established by the Investment Advisers Act of 1940. For many years, broker-dealers only had to meet a suitability standard that required them to provide "suitable" advice but not necessarily put clients' interests first or recommend the best option.
In 2019, however, the SEC issued a new rule for broker-dealers known as Regulation Best Interest (BI). The name can cause some confusion, as it might seem the same as the fiduciary standard for RIAs. But in general, Regulation BI is less stringent. The main difference is that Regulation BI only applies to investment-related advice, whereas the fiduciary standard applies to the whole relationship.
So, a fiduciary financial advisor has to act in your best interest in all areas, like when discussing taxes and estate planning, as well as lifestyle choices that relate to finance, like choosing where to live in retirement. Under Regulation BI, however, brokers only have to act in your best interest when making a recommendation about an investment or investment strategy.
Note that some advisors are both RIAs and brokers, and thus they might fall under different rules in different situations. Again, you should consider asking your advisor or potential new ones what their role is exactly and what regulations or codes of conduct they follow.
Fee structure
Typically, fiduciary advisors are fee-only, meaning they only receive money from clients, not from other sources like commissions from other finance companies for selling their products or services. That said, an advisor could be both an RIA and broker-dealer, so they might receive commissions when selecting investments for you while also collecting client fees for other financial services. This fee structure should be made transparent to clients, but you can always ask for more clarity.
For fee-only advisors, they might receive client fees by charging you an annual percentage of assets they manage or advise on, or they might have a flat fee or hourly rate.
Conflicts of interest
In general, both fiduciaries and non-fiduciaries following either the SEC's fiduciary standard or Regulation BI must avoid or disclose conflicts of interest. In practice, though, many fiduciaries go further to avoid conflicts of interest or simply don't have them in the first place, due largely to the fact that they often are fee-only, rather than earning commissions for products they recommend. Plus, fiduciaries have more of an ongoing duty of loyalty throughout the relationship, not just for investments, so they often go further to minimize conflicts of interest.
Benefits of working with a fiduciary financial advisor
Working with a fiduciary financial advisor can provide several benefits to individuals, such as:
Trust and transparency
The legal and/or professional obligation to act with a duty of loyalty and care helps foster trust and transparency with clients. Fiduciaries typically try to avoid conflicts of interest throughout the relationship but will at least disclose if some are unavoidable.
Personalized financial planning
Because fiduciaries act in your best interest in all aspects of the relationship, you generally get personalized, unbiased advice in multiple areas like tax planning and retirement planning, not just investment management. Still, this depends on what services the advisor offers.
Expert guidance
As mentioned, the term financial advisor is not regulated, so someone might call themselves one without having much expertise. However, if you're working with a fiduciary who is a CFP, for example, then that might give you assurance that they can provide expert guidance across the main areas of financial planning. You shouldn't assume a fiduciary is an expert, but there's often a correlation between fiduciary status and expertise. You can always ask questions about their experience and certifications/education.
Unbiased advice
Because fiduciaries generally aren't earning commissions and are acting in your best interest throughout the relationship, many individuals feel confident they're getting unbiased advice.
How to find a fiduciary financial advisor
Now that you understand the value of a fiduciary, here are a few tips on how you can find the fiduciary financial advisor who's right for you:
Professional designations
Consider searching for an advisor through the organizations behind professional designations that require members to be fiduciaries, such as the CFP Board. That said, not all professional designations require members to be fiduciaries, so you'll want to explore that aspect first.
National Association of Personal Financial Advisors (NAPFA)
NAPFA is a leading organization of fee-only, fiduciary financial advisors. Individuals can easily search for one of these advisors through NAPFA's site.
FeeOnlyNetwork.com
FeeOnlyNetwork.com is another great resource for finding fee-only fiduciary advisors near you, as you can easily use their online directory to search for one in your area.
Referrals
Reach out to friends and family for recommendations. If they direct you to a financial professional, be sure to ask whether they're a fiduciary.
Interviews
Many advisors offer free consultations. Use this time to interview different ones to see who's the right fit for your needs, as this is a big decision for your financial future. You can also use this time to clarify their role as a fiduciary.
If you have doubts, you can request that they sign a Fiduciary Oath. True fiduciary advisors should have no problem agreeing to this or at least can provide some sort of assurance that they will act as a fiduciary to you. Those who avoid doing so might not be appropriately qualified if you're looking for a fiduciary financial advisor.
Note: Another option for those seeking investing guidance is using an automated robo-advisor. They are required by the SEC to be fiduciaries like RIAs, but they have many financial planning limitations you should weigh before electing to go that route. Here are our picks for the best robo-advisors.
FAQs about fiduciary financial advisors
How much does a fiduciary financial advisor cost?
Fees vary depending on the fiduciary's fee structure. Typically, fiduciaries are fee-only and charge about 1% of your assets per year, or a flat fee (it varies greatly based on what's involved, but often in the ballpark of $1,000-$10,000 per year), or roughly $150-$300 per hour.
Do I need a fiduciary financial advisor?
Many individuals prefer working with a fiduciary financial advisor to get more objective, comprehensive financial advice across areas like investing, retirement planning, and tax management. That's not to say all fiduciaries can help in these ways, nor that non-fiduciaries can't, but you can often find well-rounded fiduciaries who are committed to acting in their clients' best interests in all areas.
What questions should I ask a potential fiduciary advisor?
When speaking with potential fiduciary advisors, consider asking questions like what their fee model is, what their qualifications are, how they address potential conflicts of interest, what types of clients they work with, and what their investment and financial planning philosophies are.
