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What's a Fiduciary (and Why It Matters So Much)

Andrea Coombes

September 26, 2022

True or false: Financial advisors are legally required to provide you with the best investments available at the cheapest possible price.

That would be a big, scary, red-light-flashing, sirens-wailing false.

How about this one: A financial advisor is legally required to put your best interests first at all times.

Again with the sirens please, because we have another false. If your financial advisor isn’t a fiduciary, they're allowed to pitch you products and services that cost you more — and put more money in their pocket.

A fiduciary financial advisor, on the other hand, is required to put your interests above their own at all times and to disclose any conflicts of interest. That isn’t always true for non-fiduciary advisors.

Regular investors like you and me lose an estimated $17 billion every year thanks to advisors who aren’t fiduciaries. It’s not that surprising: We’re human, and we like to believe that someone we’ve paid to help us will put our interests first.

If only.

Unfortunately, many people who call themselves financial advisors are more focused on increasing their own and their company’s bottom line. You’re way down the list.

Fiduciary vs. non-fiduciary: It’s complicated

Keep in mind this isn’t some secret, undercover fraud we’re talking about. Nope, the law actually says that non-fiduciary advisors are not held to as high a standard as fiduciary advisors.

For example, fiduciary advisors are required to serve your best interests at all times, but broker-dealers — who buy and sell investments and often offer financial advice — are required to put customers’ best interests ahead of their own only in the moment of offering investment recommendations. Head-scratching, yet true.

In contrast, if you’re getting financial advice from a Registered Investment Advisor, known as an RIA, that person is a fiduciary and thus legally obligated to put your interests ahead of their own all the time. Similarly, Certified Financial Planners are fiduciaries to their clients. And other financial advisors, even those who aren’t RIAs or CFPs, sometimes voluntarily abide by the fiduciary standard.

Here’s what can get really confusing: Some financial advisors are fiduciaries some of the time. These advisors are both broker-dealers and Registered Investment Advisors. In the latter role, they must be fiduciaries. But when they’re acting as stockbrokers, they don’t have to be fiduciaries. If you’re getting advice from an investment advisor who’s also a broker-dealer, be wary.

Let’s not forget that the title financial advisor has no legal meaning. Pretty much anyone can call themselves that. So rather than focusing on the title your advisor is using — whether it’s financial advisor, money manager, investment advisor, stockbroker, portfolio manager or something else — focus on finding out if they’re a fiduciary.

Rather than focusing on the title your advisor is using — whether it’s financial advisor, money manager, investment advisor, stockbroker, portfolio manager or something else — focus on finding out if they’re a fiduciary.

How to tell if your financial advisor is a fiduciary

Luckily, it’s not hard to find an advisor who is 100% fiduciary, 100% of the time. Here are some ways to do just that:

  • Ask. “Are you a fiduciary in all of your interactions with me?” If the advisor says anything but “yes,” look elsewhere for financial advice.
  • Use Finra’s BrokerCheck tool to search for your advisor. If you see “IA: Investment Adviser Firm” on the advisor’s BrokerCheck page, that’s the sign you’re working with a Registered Investment Advisor, or RIA, and they are fiduciaries. But if you also see “B: Brokerage Firm,” or if it says only that, then you have a non-fiduciary situation.
  • See if the advisor is a Certified Financial Planner (CFP). Anyone who is certified as a CFP in good standing has sworn to act as a fiduciary when working with clients. Check a CFP advisor’s status on the CFP Board’s “Verify a CFP professional” page.

What is an example of a fiduciary?

Here’s one example of what it means to work with a fiduciary: Say you’re working with a financial advisor and you ask them to recommend a retirement investment portfolio for you. A fiduciary advisor is required to suggest the best plan for your situation — and the lowest cost investments to build that best plan.

A fiduciary advisor is required to suggest the best plan for your situation — and the lowest cost investments to build that best plan.

For a broker-dealer, meanwhile, the regulations are vague about when that broker can or can’t recommend higher-cost products to you. We all know what that means, right? It’s not the best situation for you, the investor.

Here’s another example: Say you pay your broker a fee that’s charged as a percentage of your invested money (sometimes called a “wrap fee”). The fee structure dictates that you pay 1% of your investment account balance to the broker every year. And let’s say you’re trying to decide whether to put a recent inheritance into a savings account or your investment account for a future down payment on a house. A fiduciary advisor would be obligated to talk with you about the pros and cons of each type of account, and possibly even other options that might be available to you, such as a bank certificate of deposit, or CD. A non-fiduciary advisor might be inclined to suggest you put your down payment funds into the investment account, thus increasing the amount of money they earn from you.

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

A fiduciary is someone who is obligated to act on your behalf — to put your interests ahead of their own at all times — usually with regard to money matters.

Some financial advisors are fiduciaries and some are not. A fiduciary financial advisor will focus on what will help you reach your financial goals, rather than what will make them the most money.

A fiduciary financial advisor will focus on what will help you reach your financial goals, rather than what will make them the most money.

Thus, a fiduciary financial advisor is a subset of the big and fairly unregulated world of financial advisors. When seeking money advice, focus on finding a fee-only, fiduciary financial advisor.

Next steps

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About the author

Andrea Coombes has 20+ years of experience helping people reach their financial goals. Her personal finance articles have appeared in the Wall Street Journal, USA Today, MarketWatch, Forbes, and other publications, and she's shared her expertise on CBS, NPR, “Marketplace,” and more. She’s been a financial coach and certified consumer credit counselor, and is working on becoming a Certified Financial Planner. She knows that owning pets isn’t necessarily the best financial decision; her dog and two cats would argue this point. Read more about Andrea.

About the editor

Carolyn Kimball is Managing Editor for Reink Media Group and the lead editor for content on investor.com. Carolyn has more than 20 years of writing and editing experience at major media outlets including NerdWallet, the Los Angeles Times and the San Jose Mercury News. She specializes in coverage of personal financial products and services, wielding her editing skills to clarify complex (some might say befuddling) topics to help consumers make informed decisions about their money. Read more about Carolyn.

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