What is a fiduciary?

Understand the biggest difference between fiduciary vs. financial advisor

Would you try to resolve a legal dispute without hiring a lawyer? Would you perform complicated bookkeeping without hiring an accountant? Then why would you try to take care of your financial planning without hiring an advisor? It’s the same idea, yet we don’t always think of it that way.

If you want to ensure your financial future is secure, you need to hire an expert – and not just any expert. You need a fiduciary financial advisor on your side. The term “fiduciary” has been a buzzword in the financial community for the last few years. Most know that it’s a term that is sometimes used to describe financial advisors, but there’s actually much more to it than that. So what is a fiduciary, how are they different from a financial advisor – and how can you find one? It’s time for you to learn everything you need to know so you can join the trend and start investing smart.

What is a fiduciary?

A fiduciary is a person or organization that is legally obligated to act on your behalf and put your own financial interests before their own. Is it a financial advisor? Yes – but there are several differences in the definition of fiduciary vs. financial advisor you need to know about.

Fiduciaries are required to carefully and holistically consider your situation and recommend the best-performing and most efficient ways to invest your money. This is called fiduciary duty, and in the discussion of fiduciary vs. financial advisor, it’s a much higher standard. Examples of fiduciaries include estate executors and trustees, lawyers, accountants, corporate officers, board members and real estate and insurance agents. Banks and bankers are also fiduciaries in certain circumstances. Even financial advisors can be fiduciaries in specific cases – but the answer to “What is a fiduciary advisor?” is a bit more complicated.

On the other hand, the only requirement for calling yourself a financial advisor is that you provide financial advice – and many people are surprised to learn that federal and state regulations don’t protect their investments as much as they thought. Traditional financial advisors, like brokers – those who work for investment firms and persuade the firm’s clients to invest in various stocks, bonds, mutual funds and so on – are paid on commission. This means they have a personal incentive to occasionally stretch the truth. Plus, the only standard for what they can sell you is that it is “suitable” for you – not that it’s your best investment or a great decision. And there are no regulations on fees or commissions they can charge.

What is fiduciary duty?

Fiduciary duty is a legal duty to act in your interest – and it’s what makes someone a fiduciary vs. a financial advisor. Fiduciary duty is the most important criteria when answering the question, “What is a fiduciary?” It ensures there is no conflict of interest between the advisor and the client and that the advisor makes no profit beyond the fees paid by the client.

In business, one of the most common fiduciary relationships is a corporate director and shareholders. Corporate directors hold three fiduciary duties to their shareholders: Duty of Care, Duty of Loyalty and Duty of Good Faith. Duty of Care means using due diligence when making decisions. Duty of Loyalty means putting the organization’s best interests above their own. And Duty of Good Faith means they must be honest and fair.

Nearly any fiduciary relationship will require Duty of Care and Duty of Loyalty. Other duties include the Duty of Disclosure, or requirement to disclose material facts, and the Duty of Obedience, which requires compliance with organizational rules.

Fiduciary duty is the most important difference between a fiduciary vs. a financial advisor – but if you didn’t know this, you’re not alone. You can tell from the video below how confused many people are by the term.

What is a fiduciary advisor?

A fiduciary financial advisor is an independent registered investment advisor who doesn’t answer to a company with their own agenda regarding what you buy. They are not a broker selling you products. Instead, a fiduciary advisor answers to the law, which requires them to put your interests first and to remove (or at least disclose) any potential conflict of interest.

Being a fiduciary financial planner involves more than just diversifying investments and making recommendations: A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Examples of fiduciary financial advisors include certified financial planners, discretionary investment advisors and nondiscretionary fiduciary financial advisors. There are also fiduciary financial advisors that specialize in consulting for small business, retirement planning and more.

Fiduciary financial advisors really started getting attention with the DOL Fiduciary Rule and subsequent SEC Regulation Best Interest. These rules have changed the industry and prompted fiduciary advisors to take their customer service to the next level. Gone are the days when advisors just recommend stocks or other products and collect a commission on them. Now, a fiduciary financial advisor must focus on providing the ultimate customer experience by developing a deep relationship with their clients so that their advice and recommendations are tailored to their clients’ interests.

Why do I need a fiduciary advisor?

Based on the concept of fiduciary duty, you can see why it’s essential to choose a financial advisor who is a fiduciary. A fiduciary advisor offers what you thought you had all along – conflict-free advice. This is essential because conflicted advice, backdoor payments and hidden fees are costing Americans about $17 billion per year, according to the President’s Council of Economic Advisors. That’s about 1% of your returns being gobbled up. Although 1% may not sound like much, a 1% reduction in fees can mean your money will last nearly a decade longer during retirement.

When you work with a fiduciary financial advisor, the emphasis is on the relationship – not the commission. In most cases, you pay them a flat fee directly for their advice, and they don’t earn income from sources like commissions, trading bonuses or trailer fees. This means they have no incentive to sell you products that provide them with this sort of income. A fiduciary advisor’s clients are the ones who pay them – meaning they keep only their clients’ best interests in mind. And what is a fiduciary if not someone to help you achieve financial freedom and unlock an extraordinary life?

fiduciary relationship

How to find a fiduciary financial advisor

You know that you want a fiduciary advisor in order to ensure you’re getting strong advice. But with all the financial titles out there – broker, financial planner, portfolio manager, investment counselor (the list goes on) – how do you find a real fiduciary? And how do you find an excellent one who prioritizes you and your goals?

1. Ask the advisors you know

Maybe a friend recommended their favorite advisor or your family has an advisor they’ve used for years, but you’re not sure if they are a fiduciary. You can always ask them! Fiduciary financial advisors will operate on a fee-only basis, and advisors must let you know if this isn’t how they operate.

 2. Use a database

The National Association of Personal Financial Advisors (NAPFA) offers the largest database of the country’s fee-only advisors.

3. Get recommendations

Many fiduciary advisors prefer to work via word of mouth, so a recommendation from a family member or friend can go a long way.

Now that you know how to find a fiduciary, be prepared with a list of questions to ask them to determine if they’re right for you. Always ask about their proven track record and request a copy of Form ADV, which advisors use to register with the Securities and Exchange Commission (SEC). Determine their experience and ensure they have a broad background and advanced degrees. Finally, don’t be afraid to negotiate fees – and always get everything in writing.

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Team Tony cultivates, curates and shares Tony Robbins’ stories and core principles, to help others achieve an extraordinary life.

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