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What Is a Fiduciary?

Fiduciaries are advisors who put your interests ahead of their own. Learn why this is important as well as how to find one here.

When you hire a financial advisor, you want to be sure your best interest is their top priority. Unfortunately, it’s not always easy to know this is the case. But with a fiduciary advisor, you can know that the person you’re working with follows a high standard of ethics that puts your money first.

This page will define the role of a fiduciary in the financial realm. We’ll also break down the types of relationships they have with clients, as well as regulations. Finally, we’ll share how you can identify and hire one of these trusted professionals.

Definition of a Fiduciary

A fiduciary is someone who has a legal obligation to keep a relationship of trust with a client or another party. In the financial world, this is a person (typically an advisor or planner), who agrees to act in such a way that puts their client and their money above all else. But it can also refer to anyone who agrees to act in a person’s best interest, e.g., you agree to help someone with their finances.

An advisor being a fiduciary is important because it signifies that they won’t have a conflict of interest when they manage your money. This contrasts with commission-based advisors, who may recommend products or investments that don’t benefit you.

Fiduciary Duty

Often, financial advisors agree to uphold a fiduciary duty. In this case, they agree to follow a standard of ethics that puts the client’s (or beneficiary/principal’s) needs and benefit ahead of their own. If, at some point, they break this agreement, then they may be held accountable for damages by the beneficiary.

When you work with a fiduciary, you should be aware of the various duties they must follow. This breaks down into four key parts:

  1. Financial decisions and actions must be in your best interest. Whoever you work with must always act with your best interest in mind. There should be no conflicts of interest.
  2. Each party’s finances must be separate. Both your and the fiduciary’s portfolios must be separate at all times. Combining them risks creating a conflict of interest, which would breach the agreement.
  3. Manage your money with great responsibility and caution. When someone takes control or assists with your assets, they must treat it as responsibly as possible. This means taking great care to pay bills, make investments, or handle any other aspect of your finances.
  4. Ensure records are complete and accurate. Complete and correct records are essential for a fiduciary. This ensures there is full transparency between them, you, and any legal authorities.

Fiduciary duties don’t limit themselves to financial advisors. Any person who agrees to handle one’s money or investments must adhere to this duty, whether it be a bank, corporate officer, or even a treasurer of a local book club.

When There’s a Breach of Duty

If an advisor breaches their fiduciary duty, it can result in serious consequences for them. They can be held legally and financially accountable by their client. Additionally, they can “lose their credentials and have to notify current and future clients,” says Austin Scott, a certified financial planner (CFP) with Pinnacle Ascent Wealth Management in Washington state. Scott also adds that professionals who break their duty “can have civil and criminal penalties against them.”

Types of Fiduciaries

Financial advisors aren’t the only professionals with this designation. In general, anybody who agrees to be or is named a fiduciary while they manage another’s money falls under this category. But there are a few common types you’ll encounter. These include:

Financial Advisors and Investment Managers

Most commonly, you’ll find fiduciaries as advisors and wealth or investment managers. The label is key because it establishes trust and removes any conflicts of interest. With it, you’ll know that they’re managing your finances with your best interest as their top priority.

Corporate Officers and Board Members

High-ranking members of a company may also be fiduciaries. If one is responsible for financial elements, such as investing, taxes, or employee retirement plans, then they’re likely to be one.

Those With Power of Attorney

In our life, we may have the ability to act on someone’s behalf or make decisions for them. For instance, a parent making decisions for their child. When someone has power of attorney over someone, they must act as a fiduciary, acting in that person’s best interest.

Fiduciary Duty vs. Suitability Standard

Financial and investment advisors must follow standards from various governing bodies. Per the Investment Advisers Act of 1940, investment advisors need to uphold their fiduciary duty at all times. These are typically registered advisors.

While advisors must act as fiduciaries, broker-dealers do not. These are individuals who buy and sell stocks, bonds, and other securities for their clients. They follow the suitability standard set forth by Financial Industry Regulatory Authority (FINRA). Under this, broker-dealers must only recommend or purchase products that are, on a reasonable basis, suitable for the customer. This is much less strict than the fiduciary standard.

Unlike fiduciary duty, the suitability standard allows broker-dealers to recommend investments or products that are suitable for their clients, but not necessarily in their best interest. Often, broker-dealers make a commission on products you purchase, which may create a conflict of interest. Hiring an advisor that puts your interests first reduces this chance.

Rules and Regulations

The Investment Advisers Act of 1940 defines an investment adviser as one who is in the business of

  • Giving recommendations, advice, or providing analyses
  • Receiving compensation for such advice

All investment advisers must register with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator to become a registered investment advisor (RIA). RIAs have a fiduciary duty to their clients. Any products or investments they recommend must be in their client’s best interest.

Doing business with someone who isn’t registered with the SEC can spell trouble. This means they’re either not a legitimate financial advisor or they’re a broker-dealer operating solely on the suitability standard. The only exception are those who are employees of a company registered with the SEC.

Finding a Fiduciary Financial Advisor

Finding a fiduciary can be difficult. Technically, only individuals with specific qualifications, such as RIAs and certified financial planners (CFPs), must follow the standard. So, when you start your search for an advisor, you should carefully vet their credentials and qualifications. You can do so by using:

Another way to find a legitimate financial advisor is by using a free matching tool. After filling out a detailed form, it will match you with up to three vetted advisors in your area.

Note: beware of financial professionals who act secretive or refuse to share their information. Also, know that commission-based advisors aren’t fiduciaries (these are typically broker-dealers). Charging this way creates a conflict of interest that would breach their duties.

How Much Do They Cost?

Fiduciary financial advisors follow fee-only pricing structures, rather than commission-based. This is because they must have no conflicts of interest. Fees may either be hourly or per project. 

Prices may also vary based on assets under management (AUM). In general, advisors using this structure charge an amount equal to about 1% of the funds they’re managing.

Frequently Asked Questions

Are broker-dealers fiduciaries?

No, broker-dealers are not fiduciaries. These are individuals or firms that buy or sell securities on their client’s behalf. They must follow FINRA’s less strict suitability standard. This is where they may only recommend a product or investment that is suitable for the customer. Because the suitability standard isn’t as strict, conflicts of interest can arise, especially when the broker is taking a commission.

What is a corporate fiduciary?

Corporate fiduciaries may be board members, officers, or others who are in charge of their company’s finances. Often, people in this type of relationship handle various activities, such as employee retirement and benefits, investments (real estate, acquisitions, etc.), and taxes.

Why are fiduciaries important?

This designation is important because you know they are putting your needs ahead of their own. Without the fiduciary duty, an advisor could recommend any product they want, mislead you, or charge a commission.

Hiring a fiduciary eliminates any doubt that a person isn’t entirely on your side. And, if they break their agreement, you can hold them legally and financially accountable for any losses.

What is a fiduciary duty?

A fiduciary duty is a legal obligation. If it’s a financial advisor, they must act in your best interest at all times. This doesn’t just mean suggesting products that are beneficial for you. They must also:

  • Maintain accurate records.
  • Keep each party’s assets separate.
  • Exercise great caution when they handle your money.

Keep in mind that financial advisors aren’t the only parties who must uphold these duties. Anybody managing another’s finances is responsible. This includes:

  • Attorneys
  • Banks
  • Corporate officers
  • Any others who take on such responsibility

Are there non-fiduciary financial advisors?

Yes, and they often broker deals that earn them a commission. They only need to recommend a product or investment which is suitable for you. This differs from a fiduciary, who can only guide you toward products that are in your best interest.