What is a fiduciary?

A fiduciary is legally bound to act in your best financial interests

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Picking a financial advisor means trusting someone else with your money and financial future. This is an important decision, as it can impact your retirement, insurance coverage and overall financial life for decades to come.

When you’re searching for the right financial professional, it’s important to understand if the person you choose to work with will act with your best interests in mind — which is exactly what a fiduciary does.


Key insights

  • A fiduciary is legally required to act in your best interest when advising you.
  • Fiduciaries are governed by various organizations, as well as by the Securities and Exchange Commission.
  • Fiduciaries are not typically paid commissions on products they recommend.
  • Nonfiduciary advisors only have to find products or services that suit your general needs, while fiduciaries are required to find the absolute best solution for you.

Fiduciary meaning

A fiduciary is a person or entity that manages money or property for someone else and is legally required to act in the best interest of that client.

“A fiduciary is somebody who must put the interests of the client before their own,” said Eric Scruggs, a certified financial planner and the founder of Hark Financial Planning.

Fiduciaries were first defined by the Investment Advisers Act of 1940. Today, there are several organizations and licenses that require adhering to a fiduciary standard, including certified financial planners (CFPs), registered investment advisors (RIAs) and members of the National Association of Personal Financial Advisors (NAPFA).

Fiduciaries can also be regulated by the Securities and Exchange Commission (SEC) or state securities regulators.

Fiduciary duty vs. suitability standard

Financial advisors are held to certain standards when working with clients. While most need to follow a “suitability standard,” fiduciaries are held to a full fiduciary duty standard.

  • A suitability standard means a financial professional is only required to find you investment products and solutions that suit your needs. Think of this as meeting your minimum standards for your financial goals.
  • A fiduciary duty requires a financial professional to find the absolute best products and solutions for your goals and requirements. This means they need to meet your highest and best standards, not just a “good enough” solution.

For example, say you’re looking for investment advice for retirement. Financial advisors held to the suitability standard may recommend a mutual fund that might work for someone in your general situation but also pays them a handsome commission. Fiduciaries will find an investment option that is ideal for your unique situation based on your goals, risk tolerance and other factors — regardless of the financial benefits to themselves.

» MORE: What do financial advisors do?

Benefits of working with a fiduciary

Working with a fiduciary means getting the best possible financial advice. Here are a few benefits of finding and hiring a fiduciary financial advisor:

  • Transparency: Fiduciaries are required by law (and their governing license or organization) to show you all the relevant details, such as fees and service costs, before you make an investment decision.
  • Minimizing conflicts of interest: Nonfiduciaries can sell you financial products that pay them a high commission, whether or not it’s the best option for you. Fiduciaries must disclose any conflict of interest or risk losing their license.
  • Broader range of investment options: Many nonfiduciary advisors work directly with a broker-dealer and are incentivized to recommend only its products and investment options. Many fiduciaries are RIAs or independent advisors with access to a wider range of investment choices that may fit your needs better.
  • Trust: Put simply, you can trust financial advisors who are fiduciaries. They are required by law to help you make the best financial decisions for your specific goals, needs and risk tolerance.

How to identify a fiduciary financial advisor

To find a fiduciary, you have to know where to look.

“While many consumers may assume that everybody in the financial services world are fiduciaries, that is not true,” Scruggs said.

“Different parts of the industry are held to different standards. Registered investment advisors are held to a fiduciary standard, and certified financial planner professionals pledge to act as fiduciaries when providing financial planning advice.”

Here are a few ways to make sure you’re hiring a fiduciary.

Search regulatory bodies overseeing fiduciary standards
There are several regulatory bodies that hold members accountable and require the fiduciary standard to be upheld. This includes the CFP Board of Standards and NAPFA . These organizations allow you to search for financial planners near you.

You can also look up a planner you are working with in the FINRA BrokerCheck tool to see more information about your financial advisor or firm.

Ask about compensation structure
If your financial advisor is compensated by commissions, chances are they are not upholding a fiduciary standard. Finding a “fee-only” or “fee-for-service” financial planner helps avoid conflicts of interest — those planners are most likely fiduciaries.

Many broker-dealers focus on selling their own funds and financial products, and though their associates might be “wealth planners” or “financial advisors,” they may not hold to a fiduciary standard. Make sure to work with a CFP if working directly with a financial advisor through a broker.

Check their approach to risk and financial planning
It’s important to understand how your financial planner helps you manage risk and your overall financial plan.

If they are simply recommending financial products or investments but don’t offer comprehensive planning services that review your risk tolerance, financial goals, timelines and needs, you may not be working with a fiduciary.

Just ask
If you’re unsure whether your advisor is a fiduciary, just ask them. You can ask how they are compensated, if they are part of any organization and if they uphold a fiduciary standard as part of their practice.

How to choose a fiduciary financial advisor

When choosing a fiduciary financial advisor, it’s important to know what your goals are and what to look for in an advisor.

“Start by understanding your needs and what you want to accomplish by working with an advisor. This will help you narrow your search to advisors that provide the service(s) you are looking for,” Scruggs said.

“Then do your research to find advisors that you want to work with. There are tools such as the ‘Find your CFP professional’ website from the Certified Financial Planner Board of Standards Inc. to help you narrow your search to a handful of advisors.”

Scruggs then recommends seeing how they are compensated and using tools like the Investment Adviser Public Disclosure website to check their background and experience.

“Once you have done that, you can meet with a few different advisors to see who you want to work with. A financial advisor is a trusted role in your life so it is important that you feel comfortable with that person, their process, services and compensation model.”

Here are a few questions to ask when interviewing a financial advisor:

  • What experiences/qualifications do you have?
  • How much do you charge for services?
  • How are you compensated?
  • Do you have references from past or current clients?
  • How do you stay updated on industry trends?
  • Are there any conflicts of interest to know about?
  • What is your financial planning process for clients?

This will help you get a clearer picture of how each financial advisor works and whether they’d be a good fit for your personal goals and requirements.

» COMPARE: Best financial advisors

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FAQ

Are fiduciaries more expensive?

Not necessarily. Fiduciaries are required to put your needs above their own, and their compensation structure may actually save you money overall. A fiduciary will choose investments that best fit your needs and may charge a flat fee, a percentage of your assets under management (AUM) or an hourly fee. Nonfiduciaries may collect a commission on products sold, and it can end up costing you more in the long run.

Is a robo-advisor a fiduciary?

Robo-advisors are automated investing services that help you choose an investment portfolio and invest your funds for you. While most robo-advisors are fiduciaries, not all are. Some robo-advisors do enter into a conflict of interest by automatically investing you in proprietary funds owned by the investment firm. It’s a good idea to work with a robo-advisor that offers a variety of funds from various brokers to avoid any conflicts of interest.

Are financial advisors required to be fiduciary?

No, financial advisors aren’t required to be fiduciaries. They are, however, regulated by FINRA and required to be licensed. Financial advisors (at a minimum) are held to the suitability standard but may not put your best interests first unless they are a fiduciary.

Are fiduciaries worth it?

To put it plainly, yes. Working with a fiduciary eliminates the worry of a financial professional recommending products or services you don’t need, prioritizing earning a commission or having a conflict of interest when working with you. Fiduciaires put your best interest first in all situations and are more transparent than their nonfiduciary counterparts.

Bottom line

Fiduciary financial planners help you create a financial plan that’s customized to your needs, and they can recommend only investments and financial products that are the best option for your financial situation. Working with a fiduciary means peace of mind, full transparency and a level of trust that just isn’t present with nonfiduciary advisors.

Look for financial advisors with a CFP designation or ones who are held to a fiduciary standard by an organization. This will help you find a quality financial professional to work with and whom you can trust with your money.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Consumer Financial Protection Bureau, " What is a fiduciary? " Accessed Oct. 17, 2023.
  2. Certified Financial Planner Board of Standards, " Code Of Ethics And Standards Of Conduct ." Accessed Oct. 17, 2023.
  3. U.S. Securities and Exchange Commission, " Information for Newly-Registered Investment Advisers ." Accessed Oct. 17, 2023.
  4. The National Association of Personal Financial Advisors, " What’s Different about a NAPFA-Registered Financial Advisor? " Accessed Oct. 17, 2023.
  5. GovInfo, " Investment Advisers Act Of 1940 .” Accessed Oct. 17, 2023.
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