What Is a Fiduciary Financial Advisor?

Wouldn’t it be nice to know if your car truly needed a specific repair or if your mechanic was just trying to sell you something? When it comes to financial advice, you can get that peace of mind by working with a fiduciary financial advisor.

A fiduciary financial advisor is legally bound to put your interests above their own. Therefore, regardless of profit or circumstance, their advice must be best for you and not necessarily for their bottom line.

Fiduciary definition

A fiduciary is a person or entity that acts on someone else’s behalf. Fiduciaries must act as if they are the person they represent and always act in that person’s best interests. That’s good news when you’re looking for financial advice, as fiduciary financial advisors are bound by rules and regulations to give you the best possible advice. And to do so, they have two core obligations to meet:

In other words, anyone acting in a fiduciary capacity must give you the best advice possible, even if that advice isn’t in their best financial interest.

What is fiduciary duty?

When someone is held to a fiduciary standard, they are required to act in your best interest. It’s not a light burden, either. These professionals must weigh a wide range of information and expertise and use it for your ultimate benefit.

In addition to fiduciary financial advisors, you’ve likely met other professionals with fiduciary relationships, including:

• Retirement plan trustees and administrators
• Directors of corporations
• Legal guardians
• Attorneys
• Priests
• Doctors

When those with a fiduciary responsibility fail to act in the best interests of those under their care, they could be subject to legal and regulatory penalties.

What is a breach of fiduciary duty?

In the financial world, a breach of fiduciary duty occurs any time a fiduciary financial advisor acts in a way that works against their client’s best interest. If that happens, the advisor may face financial penalties and, in severe cases, be barred from practice.

When working with a fiduciary advisor, your advisor would be in breach if they:

• Fail to research recommendations. If your advisor makes investment advice without doing the research and due diligence to ensure those recommendations are the best fit for your needs.
• Fail to manage and disclose conflicts of interest. If your advisor doesn’t attempt to minimize conflicts of interest and transparently disclose any conflicts they cannot eliminate.
• Churn your account. If your advisor boosts their commission payout by making excessive trades within your account or makes trades you haven’t authorized.
• Make improper rollover recommendations. If your advisor recommends that you roll a retirement account over to their custody and doing so could force you to pay higher fees and have worse investment options.

How do I find out if an advisor has breached fiduciary duty?

Believe it or not, it’s pretty simple. You can research a financial advisor’s disciplinary history through any of the following websites:

• Securities and Exchange Commission’s (SEC) Investment Adviser Public Disclosure (IAPD) database
• FINRA’s BrokerCheck
• State regulator websites

If your advisor works for a registered investment adviser (RIA) or runs an RIA firm, we suggest you use the SEC’s IAPD website. Here, you can review a firm or individual’s Form ADV — a legally required filing submitted annually to the SEC — which lists all disciplinary disclosures in the past 10 years.

We even have a guide to help you navigate Form ADV.

Are all financial advisors fiduciaries?

“Financial advisor” is a title without a precise definition, which means that many different types of financial professionals can hold themselves out as financial advisors. And not all of these professionals are fiduciaries.

Investment advisors are fiduciary financial advisers, meaning financial professionals registered with either the SEC or their state regulatory board. Certified financial planner (CFP) professionals are also bound by a fiduciary duty, meeting experience, education, and exam requirements and adhering to a strict code of ethics.

However, brokers — who can make securities transactions on your behalf — are not fiduciaries. Instead, they are bound by the “suitability standard,” meaning they must make recommendations that are reasonably suited to your situation. Those recommendations don’t have to be in your best interest.

It’s also important to understand that some financial advisors are dually registered as investment advisors and brokers. In that case, they can be bound by a fiduciary duty when they give advice but only by the suitability standard when they execute a trade on your behalf.

Are robo-advisors fiduciaries?

Virtually all of the top robo-advisors in the marketplace are registered with the SEC as RIAs, which means they are technically fiduciary financial advisors. However, some might argue that it’s impossible for robo-advisors to be fiduciaries when they’re actually automated investing platforms run by algorithms.

We would say that unless you have consistent contact with a credentialed human financial advisor at your robo — as many offer investors access to CFP professionals, which must act as fiduciaries — then it would be difficult to fully make the claim that your robo is a fiduciary.

Why is having a fiduciary advisor important?

Trusting someone with your money is a big deal. After all, your financial decisions will go a long way toward determining the opportunities available to you and your family.

And there are good and bad financial advisors of all types. No specific designation will guarantee that an advisor will give you good advice. But there are a few reasons why working with a fiduciary financial advisor is a good starting point in figuring out who you can trust with your financial future.

• First, fiduciary financial advisors are held to legal and professional standards that other financial professionals are not, requiring a certain level of care and competence. Advisors can face severe consequences if they don’t continuously meet those standards.

• Second, there’s a good chance that someone who has made an effort to become a fiduciary financial advisor did so because it was important to them. And if it’s important to them, there’s a good chance that they genuinely want to offer advice that’s in your best interest.

• Finally, a subset of fiduciary financial advisors are fee-only — they’re only paid directly by their clients and don’t earn commissions for sales of financial products. Fee-only compensation can further minimize conflicts of interest and possibly offer you increased peace of mind.

How do you find a fiduciary financial advisor?

Getting matched up with a fiduciary financial advisor is easy. First, many financial professional organizations like the CFP Board offer advisor search engines. And here at MagnifyMoney, we believe so strongly in fiduciary advisors that we’ve built a tool to help match you with one. Just use the form below to start your search and we’ll do the rest.