What Is a Fiduciary Advisor?
Point of Interest
Fiduciary advisors are legally bound and required to make financial decisions with the clients’ best interests in mind and without conflict of interest or bias.
Money managers across the country are not always held to the same standards. While most financial advisors naturally put their client’s best interests at the front of the decision-making process, it’s not always required. Taking the time to understand what fiduciary duty is and how it applies to money managers is a key step in the advisor-selection process.
What is a fiduciary financial advisor?
According to the Securities Exchange Commission (SEC), all investment advisors are fiduciaries. However, there are varying standards about the duties that different types of advisors have to their clients. The commission separates advisors into two main categories — investment advisors and broker-dealers. Understanding the difference between the two is key to understanding what a fiduciary financial advisor is.
A fiduciary investment advisor is required to put their client’s best interest at the forefront of all decisions. All the advice they give must put the client’s interests above their own. The exact definition of the relationship and the requirements is broad, but it aims to “eliminate, or at least to expose, all conflicts of interest which might incline an investment advisor—consciously or unconsciously—to render advice which was not disinterested.”
Broker-dealers, on the other hand, are only held to a “suitability standard.” This means broker-dealers are only required to make recommendations or take actions that suit the interests of their clients. While this may sound similar, it’s a lower standard of responsibility. As long as the broker thinks the advice is suitable for their client, they can give it.
Over the past few years, government officials have tried to reshape the requirements for broker-dealers. Effectively, they’ve tried to raise the suitability standard to be on par with the fiduciary duty standards required of investment advisors. The goal is to eliminate advisors who make decisions that generate additional profits for themselves or their firm while jeopardizing the interests of the client.
For example, if an advisor makes money every time a transaction is executed, there may be an urge to push through more transactions when they are not necessary. A fiduciary financial advisor is not allowed to do this as it puts their interest ahead of the clients.
What is fiduciary duty?
Fiduciary duty is a term that extends past the financial realm and means an obligation to act in the best interest of another party. For example, a business owner might have a fiduciary duty to their stockholders, meaning that all decisions they make for the company must have the company’s best interest at heart. Attorneys have fiduciary duties to their clients. They’re required to do what is best for their client, or they can be held legally responsible. Fiduciary duty exists in most areas of society and not just the financial world.
In the financial advising world, this is a responsibility to make financial transactions and give financial advice that is best for the client. This includes things like providing all relevant facts about a decision, disclosing potential conflicts of interest, not using the client’s assets to benefit themselves and always putting the client first.
Differences between fiduciary and financial advisor
While all financial advisors do have a moral responsibility to do what is best for their clients, not all advisors are legally bound to the highest level of fiduciary duty. Fiduciary financial advisors are required to do everything in their power to put your interests ahead of their own.
Broker-dealers and any other advisors not bound by this duty, on the other hand, do have to try their best to do what is right for their clients, but they are held to a lower standard. You’ll notice, there is no requirement to place their interests below the clients. All they have to do is believe that the information and advice they are providing are suitable for the client.
What does this look like in practice? A broker-dealer might be incentivized to sell an investment product they get a kickback on over one that they do not. This could legally happen even if the advisor knows there is a better product out there. As long as they think the product they are selling to you suits you, it’s allowed in the eyes of the law.
A fiduciary financial advisor, though, could be held legally responsible for doing this. If they know that a product exists that’s better for a client, they are required to recommend it. Because of this, investors that use fiduciary financial advisors get more transparency, better advice, better recommendations and ultimately have better odds of success.
How to find the best fiduciary financial advisor
The best way to find out if a financial professional is a fiduciary is simple — ask. You’ll want to know if you’re working with a money manager who is legally bound to have your best interest at heart. Investment advisors that advertise their fiduciary requirements could be a good fit as well. This demonstrates they’re fully aware of their requirements and take them seriously.
During the interview process, ask them to explain their fiduciary responsibility. Yes, you already know what it is, but you want to see what it means to them. If it gets downplayed as not a big deal, you may want to seek a different advisor. If you get extensive detail about protecting your best interests, you may have found a winner.
Ultimately, the decisions of who to invest with are yours and yours alone. Find someone you trust, and you believe has your best interests at heart. Enforcing fiduciary duty can be challenging, especially in an industry you may not fully understand. There’s nothing wrong with money managers not bound by the highest levels of fiduciary duty as long as you trust they’re going to do what is best for you.
Once you find a financial advisor (fiduciary or not), keep a close eye on the decisions they make and how they conduct themselves. If you’re not happy with the results, take your money and business elsewhere.