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What Is A Fiduciary?

By: David Bach  |  Last Updated: January 14, 2021
Financial Expert & 10x New York Times Bestseller
IN THIS ARTICLEWhat is the fiduciary standard?
What is the suitability standard?
Updates to the fiduciary regulatory landscape
Why you should always work with a fiduciary
Who follows the fiduciary standard?
How to make sure your advisor is a fiduciary
How to find a fiduciary

When it comes time to hire a financial advisor, there’s one term you’re going to want to fully understand: fiduciary.

“Financial advisor” is an extremely broad title — there are many different types and they aren’t all held to the same standards when managing your money. 

There are two main standards in the financial services industry: fiduciary and suitability. Below, we’re going to explain the differences, who is bound to which standard and why you should always work with a fiduciary.

What is the fiduciary standard?

A financial advisor bound to the fiduciary standard is legally required to put their client’s interest ahead of their own, avoid conflicts of interest (or disclose any if they arise) and offer complete and accurate investment advice. 

You may think that this is a given — that all advisors would put your interest above their own — but a lot of professionals in the industry don’t actually have a fiduciary obligation.

What is the suitability standard?

Advisors who aren’t held to the fiduciary standard are held to a much looser suitability standard, which only requires an advisor to make recommendations that are “suitable” or appropriate for their client’s situation.

They must offer advice that aligns with their client’s financial goals, but it doesn’t have to be the best advice. 

To help explain the difference between advice that’s “appropriate for me” and advice that’s “best for me,” certified financial planner Michael E. Kitces uses the example of buying clothes at a retail store. “If I go to the Gap and they say the pants look good on me, we all understand that this is not official fashion advice,” he tells Finishrich.com. “They get paid on commission to get me to buy the pants, so they say the pants look good on me because they want me to buy the pants from them.”

That’s different from hiring a fashion consultant, whose job is to help you look as stylish as possible, he adds: “They don’t get paid for the clothes — they’re getting paid by me to give fashion advice.”

In this example, the Gap salesperson is held to the suitability standard and the fashion consultant is held to the fiduciary standard. 

Here’s another way to think about it: Food advice from the butcher is going to look different than food advice from a nutritionist — the butcher is going to recommend red meat, since their job is to sell it, whereas a nutritionist is going to give you well-rounded nutritional advice because that’s what you hired them to do.

“‘Fiduciary’ and ‘suitability’ are really just legal jargon terms for the difference between a person giving advice and a person that’s selling stuff,” explains Kitces.

That said, we do apply standards for salespeople, he adds: “You can’t sell me rancid meat. You can say that the clothes look good on me, but they do at least have to actually fit.”

The bottom line: Fiduciary is the standard that says you have to give advice that’s in the very best interest of the person receiving the advice, while suitability is the standard that says you have to give recommendations that are simply not unsuitable. 

Updates to the fiduciary regulatory landscape

Recently, there have been some important updates to the fiduciary regulatory landscape, notes Kitces: “The big one is that the suitability standard for brokers is being scaled back. It was replaced last year by something called Regulation Best Interest, or Reg-BI for short.”

The core of Reg-BI is similar to that of the suitability standard, he explains: “It’s a standard that applies to salespeople who are not fully in the business of advice, but it ups the standard a bit and says that when a broker gives a sales recommendation to someone, it really should be the right thing for them at the moment of the sale.”

In other words, it’s not as high of a standard as the fiduciary standard, but it’s getting closer. Back to the Gap example above, that means a salesperson should sell you a shirt that looks decent on you at the time. 

“Part of the challenge, though, is that the brokerage firm is not under any obligation to act in your best interest,” says Kitces. “So, the salesperson has to try to sell you what shirt would look best on you, but they are only allowed to recommend the shirts that the company made and put on the shelf. They’re not going to tell you if the best shirt for you is at another place across the street, but they will at least try to sell you the best shirt they’ve got.”

Again, it’s a slightly higher standard that brokers must adhere to, but not the fiduciary standard by any means.

Why you should always work with a fiduciary

When it comes to hiring a financial advisor, you want a professional who’s going to keep your best interest in mind at all times and is completely transparent — and that means working with a fiduciary.

What you don’t want is an advisor who may steer you toward certain products that will earn them higher commissions. After all, this is your life savings we’re talking about.

The only way to ensure you’re getting the highest quality financial advice specific to your situation is to hire a fiduciary.

Who follows the fiduciary standard?

As mentioned above, the term “financial advisor” is a broad one and not all advisors are held to the same standards.

In fact, “the regulatory requirements to become a financial advisor are very, very low,” says Kitces. “It’s a high school diploma and a three-hour regulatory exam — and, technically, the diploma is optional. You don’t ever have to have learned or studied anything about money ever, aside from what it takes to pass a regulatory exam that most people study for in a few weeks.”

In short, it doesn’t take much to be able to put “financial advisor” on your business card. That means, it’s extra important to do your due diligence when looking for a prospective advisor. 

You want to look for someone who’s in the advice business (fiduciary) — not someone who’s in the sales business (suitability). The good news is, some advisors are required to follow the fiduciary standard, including registered investment advisors (RIAs). These are professionals who are registered with the SEC or at the state level, and if you hire one, you can be sure you’re working with a fiduciary.

You’ve also probably heard of the term “certified financial planner,” or CFP for short. These are financial advisors who have completed specific education and training, have thousands of hours of experience and have passed the CFP Exam, a rigorous 170-question, multiple-choice test. Like RIAs, CFPs are held to a fiduciary standard — and they’re highly qualified to give money advice.

Sales professionals, on the other hand, work either at broker-dealers or for insurance companies (companies that exist for the purpose of manufacturing and distributing financial products). 

What can be extremely confusing for consumers, says Kitces, is that many advisors are “dually registered” or a “hybrid advisor.” In other words, “they’re both,” he explains. “They are an advisor and a salesperson, and they can switch which hat they’re wearing.”

We’ll explain how to find an advisor who is fiduciary at all times below.

How to make sure your advisor is a fiduciary

When you’re looking for a financial advisor, there are three things you can do to ensure that they’re a fiduciary:

1. Ask your prospective advisor, “Are you a fiduciary?” This is the simplest way to find out. If the answer is “no,” they’re not wearing an advisor hat at any point.

If the answer is “yes,” you’ll want to find out if they’re a fiduciary at all times or if they’re dually registered. Again, if they’re dually registered, they sometimes work as a fiduciary and sometimes work as a “salesperson,” as they are licensed to sell insurance and/or other financial products. That’s not necessarily a bad thing: If you want a financial planner to do it all, including sell you insurance, then you may need to work with a hybrid advisor. You just want to find one who is open and upfront about their dual registration and exactly how they’re compensated.

If you’re at all uncomfortable with a hybrid advisor, though, work with a professional who’s a fiduciary at all times.

2. Look at your prospective advisor’s registrations. Use BrokerCheck, a site run by FINRA, to see if they’re registered with a broker-dealer or a salesperson. If they are, they’re in the sales business and aren’t held to the fiduciary standard.

If they’re a registered investment advisor, on the other hand, they follow the fiduciary standard.

3. Ask your prospective advisor how they get paid. You can tell a lot about an advisor by understanding how they earn money. If they’re a “fee-only” advisor, that means they’re paid directly by the client and cannot earn commissions, meaning they’re not incentivized to sell you certain products and are truly in the advice-business. They only collect fees — either an AUM (assets under management) fee, flat fee or hourly fee. 

A “fee-based” advisor, on the other hand, earns a fee from their client but can also collect commissions from products they sell — and their commissions, which can be anywhere from 1-6% of your investment, come straight out of your wallet. If your advisor is earning commissions, they’re in the sales business in some capacity.

Before hiring any advisor, you’ll want to have them explain in detail exactly how they’re compensated.

An investment advisor who is a fiduciary at all times is going to be a fee-only advisor, as they can’t sell your products and earn commissions. If you’re looking for a financial plan and help managing your assets (and you don’t need insurance) then you’ll want this type of advisor. How do you find one? Read on for tips and resources.

How to find a fiduciary

When it comes to finding a fiduciary, the process looks different depending on whether or not you have a referral or if you’re looking cold.

If you’re looking cold, start by looking for RIAs that operate on a fee-only basis. There are several resources to help you find these types of advisors in your area:

If you got a referral from a friend or family member, you’ll want to do your due diligence before hiring them. Use BrokerCheck to find out if they’re a registered investment advisor, a broker or both. (Remember, you want to work with an investment advisor.)

If they’re an investment advisor, the next thing you can do is look at their “Form ADV.” This is a public disclosure form that every RIA must provide. You can find it on the SECs IAPD site or on the advisor’s website. The form will give you more information on what services they provide, the fees they charge and whether they have any other affiliations (like a brokerage business on the side, for example). 

For more information, read our full guide to choosing a financial advisor.

Read next: Robo-Advisors vs. Financial Advisors: How to Know Which One is Right For You