What Is a Fiduciary Financial Advisor?

Not all advisors are obligated to put your interests first.

It’s clear that not all financial advisors are the same, but it might come as a surprise to learn there might be a legal distinction between one advisor and another. For most financial advisors, the bulk of whom used to be known as stockbrokers, their only legal obligation to a client is that they make recommendations for clients that are “suitable.” Fiduciary financial advisors, on the other hand, have a stronger requirement. These investment professionals, which includes investment advisors and Certified Financial Planners, must act solely in a client’s best interest when providing personalized financial advice. Although this might not seem like a big difference, it’s enormous. Keep reading to find out why you should consider working with a financial advisor who adheres to the fiduciary responsibility standard.

Here’s what this guide to fiduciary financial advisors will cover:

What Is Fiduciary Duty?

Fiduciary duty requires a financial advisor to always act in a client’s best interests, even if those interests conflict with the advisor’s own. It came into effect under the Investment Advisers Act of 1940, which regulates investment advisors under the auspices of the Securities and Exchange Commission.

Fiduciary vs. Financial Advisor

Aren’t all brokers or financial advisors required to adhere to the fiduciary standard? Contrary to public belief, no, they are not.

Whereas fiduciary financial advisors are governed by the Investment Advisers Act of 1940, traditional financial advisors fall under the auspices of the Securities and Exchange Commission and FINRA Rule 2111. These regulations require that financial professionals must provide recommendations that are “suitable” for a client. “Suitable” recommendations might or might not be in the best interest of a client, marking a distinct difference from the fiduciary standard of care.

Registered investment advisors and certain financial professionals, such as Certified Financial Planners, are held to the fiduciary standard of care. Others, such as registered representatives or stockbrokers at major firms, are only held to the suitability standard of care.

Here’s an example to highlight the difference. Say you’re working with a stockbroker at XYZ brokerage firm. You’ve indicated that you are 60 years old and you want guaranteed income in your retirement. Your broker might recommend that you buy an annuity, which carries high surrender fees if you need to sell it and provides the broker with a 5% commission. This could be construed as a “suitable” recommendation, but it might not be in your best interests. Annuities can carry high costs and restrictive withdrawal properties, and more liquid and affordable investment options could be available that would be more in your best interest.

Generally, unless you already have a strong, existing relationship with a financial advisor that you trust and who has always acted in your best interest, you should consider working with a fiduciary financial advisor.

Here’s a quick look at the differences between fiduciary duty and suitability standard:

Fiduciary Duty vs. Suitability Standard
Fiduciary DutySuitability Standard
Must act in client’s best interestMust provide suitable investment recommendations
Must disclose conflicts of interestNot required to disclose conflicts of interest
Duty of care and loyalty No legal requirement for duty of care and loyalty

For most investors, particularly those willing to hand over their financial guidance to an outside advisor, a fiduciary financial advisor is the better choice. Investors who manage their own portfolios and understand the risks and rewards involved in various investments might be comfortable working with a broker operating under the suitability standard only.

Also See: What’s the Difference Between a Certified Financial Planner and a Financial Advisor?

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Financial Advisor Fees

Financial advisor fees come in many forms. A few of the fees you might encounter include:

  • Advisory fees: payment for investment management
  • Consulting fees: payment for analysis of an investment strategy or the development of a plan
  • Subscription fees: payment via fixed monthly or annual fees, as opposed to fees based on a percentage of assets under management
  • Administration fees: payment for administrative expenses, such as the creation of statements and other account management costs

Fees aren’t necessarily bad — after all, advisors provide a valuable service, and they should be compensated for their work. But some fees are structured so that your broker’s self-interest might be in direct conflict with yours. For example, brokers who are 100% commission-based are only paid when you undertake a transaction. Brokers can be motivated to encourage you to trade even when that is not in your best interest.

One of the ways to get your broker’s interest to align with your own is to pay your broker a fee based on a percentage of your assets. That way, when your assets grow, both you and your broker make more money. When your assets decline, your broker earns less as well. This can help incentivize your broker to work in your best interest, as the more money your broker can help you earn, the more they can help themselves earn as well. 

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Do I Need a Fiduciary Financial Advisor?

Although you don’t need a fiduciary financial advisor simply to execute trades, working with someone whose interests are legally mandated to be aligned with your own might indeed be considered a necessity.

In some cases, the difference between the fiduciary standard and the suitability standard can be vast. “Is selling a client a mutual fund with a 2% expense ratio and a 5% load fee ‘suitable’? Difficult to prove that it’s not. Is it fiduciary? No!” explained Dejan Ilijevski, president of Sabela Capital Markets.

“All financial advisors should act in their client’s best interest; however, certain advisors must act in their client’s best interest by the rules of their licensure,” said Mark Charnet, founder and CEO of American Prosperity Group.

This doesn’t mean that all clients should only invest with fiduciary financial advisors. Financial advice is relationship-based, and if you’re working with a professional you are certain you can trust, there might not be a need to switch to a fiduciary financial advisor. “As an investor, I would engage a fiduciary but I also understand why much of the public doesn’t. They look at the relationship, and not necessarily at the process or product,” explained Morris Armstrong, founder & owner at Armstrong EA LLC. But for beginners and those without an existing financial advisor relationship, starting with a fiduciary might be a prudent first step.

Read More: Do I Need a Financial Advisor?

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How Do I Find a Fiduciary Financial Advisor?

Financial advisors are easy to find. Simple Google searches in your neighborhood will yield plenty of options, as will asking your friends and colleagues or even driving down your street in any moderate-sized or larger town. But to find a fiduciary financial advisor, you’ll have to dig down a little bit.

As mentioned above, any investment advisor or Certified Financial Planner is by definition a fiduciary, so you can start with the industry associations that serve these types of advisors. The National Association of Personal Financial Advisors maintains a database of fee-only financial planners and provides educational information for consumers. The CFP Board oversees more than 84,000 U.S.-based Certified Financial Planners and allows users to search and verify CFP credentials for any individual.

Both avenues are good places to start. If you’re already working with an investment firm, you can ask the manager if any of the professionals in that office are fiduciaries.

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Questions To Ask a Financial Advisor

Choosing a financial advisor is a big decision. Before you commit to working with a financial advisor, remember that you are one making the hiring decision. You are the boss, and you should treat the advisor like your employee. In other words, you should go through an interview process before you make your choice, as your decision can have a huge impact on your financial life. Here’s a list of questions you might want to ask a financial advisor before you make your choice:

Are you a fiduciary financial advisor?

With this question, you’ll know right off the bat what standard your advisor is using.

How do you get paid?

As noted previously, there are numerous ways that a financial advisor can earn money. Understanding how your advisor is paid lets you know whether their income is dependent on a decision that might or might not be in your best interest. 

What are your qualifications?

Generally speaking, you’ll want to select an advisor with some type of professional certification, such as a CFP or RIA. These professionals are legally required to work in your best interest, and in the case of a CFP, they also undergo extensive additional training.

What Is Your BrokerCheck Record?

All financial advisors have a regulatory record that can be accessed online via the FINRA BrokerCheck system. When you ask your financial advisor, he or she should inform you about what you might find in their record before you check it out for yourself. This will also give them the chance to explain any black marks you might find in the record.

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A Final Word on Fiduciary Financial Advisors

At the end of the day, no one “needs” a fiduciary financial advisor. Any registered representative can enter the same trades as any other financial advisor, and many of them share the same basic knowledge of markets and investments. That said, should a situation arise in which a broker’s best interests might collide with your own, you could end up on the short side of the encounter. With a fiduciary financial advisor, you can rest assured that the person on the other end of the phone or table is always acting in your best interest and that this fiduciary relationship is a legal requirement. If nothing else, this provides peace of mind that you will not be taken advantage of. For many investors, that is a priceless investment in and of itself.

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About the Author

John Csiszar is a freelance writer and article curator. He served as a registered investment advisor for 18 years before becoming a writing and editing contractor for private clients. In addition to writing thousands of articles for various online publications, he has published two educational books for young adults.