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What Is a Fiduciary?
Fiduciaries are professionals or organizations that act in the best interests of another person or group of people. A Fiduciary cannot have any conflicts of interest concerning products and services offered to clients. Individuals who can be held to a fiduciary standard include investment advisors, attorneys, tax advisors, real estate agents, and corporate board members.
Investment advisors who are fiduciaries have a legal requirement to recommend high-quality investments that are best for the client. They must disclose any potential conflicts of interest. For example, a fiduciary investment advisor is required to recommend investments that are most appropriate for the client's needs rather than a self-serving interest such as a commission.
Note: Not all financial professionals are fiduciaries. While any investment advisor or financial planner may choose to act in the best interests of a client, the financial professional is not a fiduciary unless they are legally bound to uphold the fiduciary standard.
What Is Fiduciary Duty?
A fiduciary duty is a duty a person or organization has to act in the best interests of another person or group of people. There are three main fiduciary duties, including duty of loyalty, duty of care, and duty of good faith. If there is a breach of fiduciary duty, the fiduciary could be required to pay damages to the client or beneficiary.
1. Duty of Loyalty
A duty of loyalty requires a fiduciary to place client interests ahead of their own. More specifically, a fiduciary must not have any undisclosed financial or personal dealings that may present a conflict of interest with a client. If there is a possible conflict of interest, the fiduciary must disclose it to the client.
2. Duty of Care
The duty of care standard requires fiduciaries to perform an appropriate amount of research and analysis before making recommendations to clients. Concerning financial planning, the advisor is required to collect and analyze information about a client's financial goals and preferences before recommending any investment actions.
3. Duty of Good Faith
To fulfill the duty of good faith, a fiduciary should research and assess a range of choices and recommend the option that is believed to serve the best interests of the client. For example, a fiduciary investment advisor would consider multiple investment choices before making a recommendation most appropriate for the client's needs.
Investor & Investment Fiduciary Relationships
An investment fiduciary may be a financial professional, such as an investment advisor or wealth manager. However, any person who has been placed in a position of trust that makes investment decisions for the benefit of another person or a group of people may be an investment fiduciary.
For example, one may be placed into an investment fiduciary role if they volunteer to be on the investment committee for their employer's 401k plan at work. Within this role, they are making decisions on behalf of their fellow employees, including the decision to select or replace an investment for the plan or the hiring or firing of the plan's advisor.
Fiduciary vs. Suitability Standards
There are two primary standards of responsibility that a financial advisor may have concerning a client, and these include the fiduciary standard and the suitability standard. Before hiring a financial advisor, it's important to understand the differences between the suitability vs. fiduciary standards.
- Fiduciary Standard: Requires that a financial advisor place the interests of clients ahead of their own and choose investments that are the best fit for the client. For example, a fiduciary must not have any undisclosed conflicts of interest, such as economic gain (i.e., sales commission) for selling certain financial products or services over others.
- Suitability Standard: Requires an advisor to make investment recommendations that are suitable based upon a given client's age, risk tolerance, and financial goals. For example, a low-risk investment, such as a bond mutual fund, is suitable for a retired client with low tolerance for risk. However, unlike a fiduciary, the advisor could get paid a commission, and the mutual fund could be the worst performer in its category and still meet the suitability standard.
CFPs & The Fiduciary Standard
A CERTIFIED FINANCIAL PLANNER™, or CFP® Professional, is a financial professional who has met certain requirements, such as financial experience, a college degree, and passage of a rigorous exam, established by the Certified Financial Planner Board of Standards.
Benefits of Working With a Fiduciary Advisor
Although brokers and financial professionals that are not fiduciaries can provide their clients with a high degree of ethical care, there are multiple benefits of working with a fiduciary advisor, including:
- Client-centered advice: A client-advisor relationship with a fiduciary is client-centered, whereas a non-fiduciary advisor is product- and sales-centered.
- No competing interests: When working with a fiduciary, the client can rest assured that investment recommendations are for the benefit of the client first and not for that of the advisor. If there is a potential for any competing interests the fiduciary is required to disclose them to the client.
- Quality of investments: Since the fiduciary chooses investments that are best for the client, and not for the advisor's economic benefit, the investment selection tends to include a wider range of high-quality, lower-cost investment securities, compared to many commission-based investments.
Other Professionals With Fiduciary Responsibilities
A common example of a fiduciary is a financial advisor or a Registered Investment Advisor. However, there are other professionals with fiduciary responsibilities, including lawyers, real estate agents, corporate board members, and trustees of a trust.
- Lawyers/Attorneys: Have a fiduciary duty to their clients and must provide legal advice without any conflicts of interest.
- Real Estate Agents: Generally considered fiduciaries, agents must disclose any conflicts of interest or related matters that may impact the value of the property. For example, real estate agents may represent both a buyer and a seller if both clients are informed and sign an agreement.
- Corporate Board Members: These are fiduciaries that must make decisions that are in the best interest of the company shareholders.
- Trustees: The person in charge of a trust, or the trustee, has a fiduciary duty to manage the assets of the trust solely in the best interests of the trust beneficiary and not for their interests.
- Registered Investment Advisors: Advise clients on investments and may manage their assets. RIAs are governed by the Investment Company Act of 1940 and must adhere to the fiduciary standard of conduct. However, note that an RIA can also be registered as a broker-dealer, and provide non-fiduciary advise through their broker.
How To Find or Identify Fiduciaries
While it's always important to ask an advisor directly if they are a fiduciary, investors may also find or identify fiduciaries by looking for professional certifications, such as a CFP, or seek a fee-based advisor, such as an RIA. There are also online tools that can help, such as NAPFA, FINRA, and SEC.
Ways to find or identify fiduciaries include:
- Ask the Advisor: Before hiring a financial advisor, ask them directly if they are a fiduciary.
- Professional Certifications: Certain certifications or designations, such as CFP and CFA, after an advisor's name is generally an indication that the advisor acts as a fiduciary.
- Look for an RIA: Registered Investment Adviser firms, and their RIA representatives, are legally bound by the fiduciary standard of care. Investors may look at RIAs registered with the SEC on their Investment Advisor Public Disclosure site.
- NAPFA: The National Association of Personal Financial Advisors, or NAPFA, has a Find an Advisor tool that can help to find a fiduciary that is a member of their organization.
- FINRA: The Financial Industry Regulatory Authority, or FINRA, offers a BrokerCheck tool that shows employment history, certifications, licenses, and any violations for brokers and investment advisors.
Bottom Line
A fiduciary is a person or organization that is legally required to act solely in the best interests of clients without any undisclosed conflicts of interest. An investment fiduciary can offer clients benefits, such as client-centered advice, that may or may not be provided by a non-fiduciary advisor.
