Key Takeaways
- Fiduciaries have a relationship of trust with another party in which they are legally obligated to always act in the other party’s best interest.
- Financial advisors can be in a fiduciary or nonfiduciary relationship with their clients. Most fiduciary financial advisors are CFAs, CFP®, registered investment advisors and members of NAPFA and ACP.
- While many clients prefer fiduciaries, some are indifferent, and others will choose nonfiduciary advisors that offer lower fees as compensation for the commissions they will earn.
The various terminologies that describe financial professionals are often confusing for those looking for help with their personal finances. For example, it can be difficult to differentiate between a financial advisor and a financial planner or a robo-advisor and a financial advisor if you are unfamiliar with their services.
Knowing whether you are working with a fiduciary or a financial advisor will help shape your expectations and avoid confusion through the process. If you expect a financial advisor to act like a fiduciary when they are not, then you may be disappointed or frustrated with the outcome.
To ensure you are getting the value you desire and are maintaining positive relationships with your financial experts, understand the distinctions between a fiduciary and a financial advisor.
Comparing Fiduciaries and Financial Advisors
Not all financial advisors are fiduciaries. To be a genuine fiduciary, one must be legally obligated to act in good faith and in the interest of the other party – in other words, a relationship of trust and loyalty must subsist. Consequently, any potential conflict of interest must be disclosed before the relationship begins.
Trustees, attorneys, board members and corporate officers are some professionals who are legally obligated to act as fiduciaries on behalf of others.
Other financial experts with legal duty to act in their clients’ best interest include CFP® professionals, registered investment advisors, CFA charter holders and advisors registered with the National Association of Personal Finance Advisers (NAPFA) and Alliance of Comprehensive Advisors (ACA).
Financial professionals that are not fiduciaries include broker dealers, who are only mandated by the Financial Regulatory Authority (FINRA) to ensure the advice they give to clients are suitable for their goals. However, suitability is not the same thing as a legal fiduciary obligation.
To avoid any confusion, we will use “financial advisor” as a generic term that includes nonfiduciary and fiduciary advisors.
Responsibilities and Legal Obligations
Fiduciary and nonfiduciary financial advisors often have the same general responsibilities — to help clients buy or sell securities, create financial plans, create and execute investment plans and develop estate plans.
However, a fiduciary is under a legal obligation to act in the client’s best interest and disclose any conflict of interest beforehand.
A nonfiduciary financial advisor, on the other hand, is not under the same obligation. As mentioned, some of them, such as broker dealers, are only under an obligation of suitability.
Education and Training
Most of the financial advisors who are fiduciaries are CFP® professionals and CFA charter holders.
The Code of Ethics for CFP® professionals includes the following statements:
- Act in the client’s best interests.
- Avoid or disclose and manage conflicts of interest.
Similarly, the Code of Ethics guiding CFA charter holders states a rule to place the integrity of the investment profession and the interests of clients above their own personal interests.
Regulations
Registered investment advisors are financial advisors who are registered under the Securities and Exchange Commission or a state securities regulation agency.
These professionals are required, under the Investment Advisers Act of 1940, to act in a fiduciary capacity.
In the words of the act, the SEC may proclaim rules with a goal to ensure that registered investment advisors “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.”
Costs
Most fiduciary advisors will advertise themselves as fee-only advisors. That is, they don’t earn commissions from the products they recommend to clients. This ensures that they are recommending the products that will be in clients’ best interest rather than those that will make themselves money.
On the other hand, nonfiduciary financial advisors are often forthright about the fact that they earn commissions from the products they recommend.
Services
Financial advisors often offer the same broad range of services, such as financial planning, wealth management, investment advisory and stock brokerage. What differentiates them is whether they have a legal obligation to act in the best interest of the customer rather than their own.
One of the most important questions to ask when interviewing a potential advisor is ‘How are you and your firm compensated?’ There are many different types of advisory models and finding the right one for your situation and goals will allow you to engage and trust in the relationship more fully.
Stephen Kates, CFP®Expert Contributor
Are All Financial Advisors Fiduciaries?
Not all financial advisors are fiduciaries. However, because many clients prefer to work with fiduciaries, some nonfiduciary advisors aren’t so candid about their status.
Therefore, it’s the responsibility of the client to confirm whether a financial advisor is a fiduciary. This can be as simple as posing the question directly to them. Most advisors will be honest about their fiduciary status. But to be certain, clients can use other means to confirm.
Directories and Resources
Registered investment advisors can be confirmed using the search tool from FINRA BrokerCheck or SEC’s Investment Adviser Public Disclosure. CFP® professionals can be confirmed on the CFP® Board’s Planner Search and CFA charter holders can be verified through the institute’s Member Directory.
Clients can also check if a financial advisor is a member of NAPFA or ACA through their respective websites. Members of all these organizations are fiduciaries.
How To Make Sure You Choose the Right Financial Professional
If you are keen on having a financial advisor who always acts in your best interest, then you are better off with a fiduciary advisor.
If you are more concerned about performance than legal obligation, you might be indifferent to whether your financial advisor (investment manager in this case) is a fiduciary or not.
Ultimately, what matters is your individual situation and what you want out of your financial advisor.
