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What is a fiduciary financial advisor? What do they do?

What is a fiduciary financial advisor? What do they do?
By
Coryanne Hicks
|
July 1, 2024

Key points

  • Fiduciary financial advisors must choose investments that best align with their clients.
  • These advisors generally take a more holistic and hands-on approach.
  •  Fiduciary financial advisors may charge more for their services.

Trusting someone with your finances is no small matter. After all, your future security is on the line. 

While it would be nice if you could trust anyone who calls themselves a financial advisor, not all advisors are held to the same standards. Work with a fiduciary financial advisor to ensure you receive the highest level of care. 

What is a fiduciary financial advisor? 

Financial advisor is a broad term encompassing different professionals who help people with their money. They may include certified financial planners, registered investment advisors, estate planners and retirement planners, to name a few.

What sets a fiduciary financial advisor apart from a nonfiduciary financial advisor is that the former is legally required to put their clients’ best interests ahead of their own. 

Fiduciaries who manage money must abide by the following duties:

  • Duty of care. Fiduciaries must make informed decisions by reviewing all available information about a client’s financial circumstances before making plans or recommendations.
  • Duty of loyalty. Fiduciaries must not use their position to further their interests. They must eliminate potential conflicts of interest; if a conflict of interest cannot be eliminated, the fiduciary must disclose the conflict to the client.

“(Fiduciary financial advisors) must choose investments that best align with their client’s objectives and share all critical information surrounding that decision,” said Laura Kaplan, South Florida market president at BNY Mellon Wealth Management. “They cannot profit from recommending certain investments over others for a client’s portfolio.”

Understanding different types of financial advisors

A certified financial planner is one type of financial advisor who is required to act as a fiduciary while providing financial advice to a client. Fiduciary financial advisors may also work for registered investment advisors. RIAs are fiduciaries registered with the Securities and Exchange Commission. 

Remember that financial advisor is a generic term with no legal definition. Anyone can call themselves a financial advisor, so you may come across a financial advisor who is held to no legal standard or a lower standard than the fiduciary one. 

Some financial advisors, including brokers, are held to the suitability standard. Under the suitability standard, an advisor must ensure their recommendations are suitable based on the client’s financial situation and investment objectives.

Investment option examples

To illustrate this point, consider an advisor who identifies the following investment options with comparable risk and return characteristics for their client:

  • Investment A costs the client 0.5% annually and earns the advisor a 1% commission.
  • Investment B costs the client 1% annually and earns the advisor a 2% commission.

A nonfiduciary advisor could recommend Investment B if it aligned with the client’s financial situation and investment objectives. On the other hand, a fiduciary advisor could not recommend a more expensive option if a cheaper alternative was available, as doing so would not be in the client’s best interest.

What is a fiduciary financial planner?

A financial planner is a type of financial advisor. Both financial advisors and financial planners can be fiduciaries. 

“Both can manage investment portfolios, discuss a client’s objectives and help a client plan for future goals,” said Matthew H. Foster, a certified financial planner and senior wealth advisor at The Colony Group.

Financial advisors

But a financial advisor tends to have a wider scope than a financial planner.

“The term financial advisor can be ubiquitous and refers to a professional who offers services other than personal financial planning,” Foster said. “For example, it’s common for life insurance agents, securities brokers or even accountants to refer to themselves as, or be referred to as, financial advisors.”

Financial planners

A financial planner typically takes a comprehensive look at your financial picture and helps you create a financial plan.

Financial planners can be certified by the Certified Financial Planner Board of Standards, meaning they have met rigorous education, exam, experience and ethical requirements. CFPs also commit to the fiduciary duty to act in their clients’ best interests.

The CFP Board also imposes a third duty on its members: to follow client instructions. This means that you, as a client, retain ultimate control over your money because a CFP cannot act against your instructions.

What do fiduciary planners do differently than other financial advisors?

What sets fiduciary planners and fiduciary advisors apart from other financial advisors is their unwavering commitment to acting in the best interests of their clients. Fiduciary financial planners generally take a more holistic and hands-on approach to managing their client’s assets than other financial advisors.

“Unlike other advisors who may have conflicts of interest due to commissions or hidden fees, fiduciary planners are legally bound to prioritize their client’s financial well-being,” said John Khoury, principal wealth manager at Savvy Wealth. 

The financial planner’s core competency is understanding the client’s specific facts, concerns and goals and then crafting and executing a strategic plan tailored to the client’s objectives. This plan will include an investment strategy and cash flow planning — analyzing a client’s income and balance sheet — and tax and estate planning, including charitable giving.

By comparison, financial advisor relationships can be more transactional. The advisor may help you choose investments or other financial products and leave it at that. Ongoing management and consultations may or may not be involved. Fiduciary financial planners are also compensated differently than some other financial advisors. Due to rules about avoiding conflicts of interest, fiduciary financial planners generally cannot earn commissions or profit from making certain investment recommendations.

Should I get a fiduciary financial advisor?

While getting the higher level of care provided by a fiduciary financial advisor is never a bad idea, there are situations where a fiduciary may not be necessary. Someone comfortable creating their financial plan may need an advisor only to help them purchase securities.

Since fiduciary financial advisors may charge more for their services, an experienced investor could save money by working with a nonfiduciary on a transaction-by-transaction basis.

Suppose you’re uncertain about the financial markets or worry you won’t be able to create or stick to a financial plan. In that case, a fiduciary financial advisor is probably the right choice for you.

Working with a fiduciary “can be particularly important when you are seeking discretionary investment advice, meaning that the fiduciary advisor will trade on your behalf and make investment decisions for you,” Kaplan said.

How to find a fiduciary

There are several free online databases where you can search for a fiduciary financial advisor near you. Great places to begin your search include the following:

Your workplace retirement plan may also provide access to fiduciary financial advisors. The Employee Retirement Income Security Act requires any advisor who has discretionary control over retirement plan assets to operate under the fiduciary standard.

Another way to find a fiduciary financial advisor is to search for investment advisory firms. All investment advisors who are registered with the Securities Exchange Commission are fiduciaries. You can check whether an advisor is registered with the SEC on the Investment Adviser Public Disclosure website.

Final takeaway

Financial advisors who do not adhere to the fiduciary standard cannot claim to be fiduciaries. So when in doubt, ask. While interviewing potential advisors, you can add the following questions to your list:

  • What is your investment philosophy?
  • What is your fee structure?
  • What type of communication should I expect if we work together?

Your relationship with your financial advisor may be one of the most impactful in your life. Don’t decide on who to work with lightly. For the highest level of care, consider a fiduciary financial advisor.

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