What is a Fiduciary?

A fiduciary is a person or organization legally obligated to act in someone else’s best interest rather than their own. In financial advice, the term usually describes an investment adviser, whose duty to put your interests first covers the whole advisory relationship rather than a single transaction.

The gap between fiduciaries and other financial professionals is narrower than it once was. Since June 30, 2020, broker-dealers recommending securities to retail customers have been bound by Regulation Best Interest, which requires them to consider costs and reasonably available alternatives and bars them from putting their own interests ahead of yours. One important difference is scope: a broker’s obligation attaches to each recommendation, while an investment adviser’s fiduciary duty runs through the entire relationship.

Fiduciary Duty: Loyalty and Care

Fiduciary obligation is usually described as two core duties.

The duty of loyalty requires putting the client’s interests ahead of the advisor’s own. Conflicts of interest must be avoided where possible and disclosed where not.

The duty of care requires acting with the skill and diligence a prudent professional would apply in the same circumstances. This covers the quality of the advice itself, not just the advisor’s motives.

Breaching either can carry legal consequences, including liability for resulting losses.

Who Is Actually a Fiduciary

Registered Investment Advisers (RIAs) and their representatives are fiduciaries under the Investment Advisers Act of 1940. They are required to act in your best interest at all times.

Broker-dealers are not held to the same standard. Under Regulation Best Interest, which took effect in 2020, they must act in the retail customer’s best interest when making a recommendation.

Certified Financial Planner (CFP) professionals commit to a fiduciary duty when providing financial advice as a condition of their certification.

Retirement plan sponsors and trustees are fiduciaries with respect to plan assets under the Employee Retirement Income Security Act (ERISA).

Some advisors operate in both capacities depending on the transaction, which is why asking whether someone is a fiduciary at all times is more useful than asking whether they are a fiduciary at all.

Fiduciary Financial Advisors: Fee-Only vs. Fee-Based vs. Commission

How an advisor is paid doesn’t settle whether they’re a fiduciary, but it usually tells you how they’re registered and where their conflicts sit.

The fee-based column is where the “fiduciary some of the time” situation comes from. The same person can owe you a fiduciary duty on a managed account and a best-interest obligation on an annuity they sell you in the same meeting.

Fiduciary Duty Beyond Financial Advice

The concept extends well past investment management. A trustee administering a trust owes fiduciary duty to its beneficiaries. An executor owes it to an estate. Corporate directors owe it to shareholders. An agent under a power of attorney owes it to the person who granted it.

In each case the structure is the same: one party has been given authority over another’s assets or decisions, and the law responds by constraining how that authority can be used.

How to Verify Someone’s Status

Ask directly whether the advisor is a fiduciary at all times and in writing. An advisor bound by the standard will have no difficulty confirming it.

Broker-dealers and investment advisers serving retail investors also have to give you Form CRS, a short relationship summary that states their standard of conduct, fees, conflicts, and disciplinary history. For the individual advisor, check BrokerCheck, run by the Financial Industry Regulatory Authority (FINRA), and the Securities and Exchange Commission’s Investment Adviser Public Disclosure (IAPD) database. Both show registrations, employment history, and disciplinary events.

To start from a shortlist, search the ProjectionLab advisor directory for fiduciaries.

Frequently Asked Questions

Is my financial advisor a fiduciary? Not necessarily. Registered Investment Advisers and CFP professionals providing financial advice are; broker-dealer representatives are held to Regulation Best Interest on each recommendation instead. Ask for confirmation in writing and check the firm’s Form CRS.

What is the difference between fiduciary and suitability standards? A fiduciary must act in your best interest across the whole relationship; a suitability standard only requires that a recommendation be appropriate for your situation. For retail brokerage customers, suitability was replaced on June 30, 2020 by Regulation Best Interest, which adds a duty to consider costs and not put the broker’s interest ahead of yours. FINRA’s suitability rule still covers recommendations that Regulation Best Interest doesn’t reach.

Does fee-only mean fiduciary? Not automatically, though the two usually go together. Fee-only describes how an advisor is paid; fiduciary describes the legal standard they are held to. A fee-only advisor is typically registered as an investment adviser, which carries the fiduciary duty, but confirm it rather than assume.

Can an advisor be a fiduciary only some of the time? Yes. A dually registered advisor may act as a fiduciary when managing an advisory account and as a broker under Regulation Best Interest when selling a product. Asking whether they are a fiduciary at all times resolves it.

What happens if a fiduciary breaches their duty? They can be held legally liable for losses caused by the breach, and may face regulatory action. Remedies depend on the relationship and the governing law.