When you hire a financial adviser, you assume they work in your best interest. Unfortunately, that's not always the case. Many people have been caught in the trap of assuming a financial adviser is working as a fiduciary and lost their wealth. Read on to understand the key differences between a fiduciary vs. financial adviser and how to ensure you're working with someone obliged to protect you.
What is a Fiduciary?
A fiduciary is an individual or entity with a legal and ethical obligation to act in the best interests of another party. Saying someone has fiduciary responsibility means they must act in the other party's best interest. While assuming that any financial professional must act as a fiduciary is natural, that's not guaranteed.
According to the U.S. Department of Labor, "Fiduciaries must act prudently and must diversify the plan's investments in order to minimize the risk of large losses." It goes on to say that they must avoid conflicts of interest and instead work in the best interest of their clients. When working with financial professionals, you want them to be a fiduciary and act in your best interests.
What is a Financial Adviser?
A financial adviser is a professional who guides individuals, families or businesses on various aspects of personal finance or financial management. Anyone can say they are a financial adviser, as it's not regulated. That's why it's important to look for financial advisers with recognized credentials who act as fiduciaries.
Look for a financial adviser with degrees in business, finance or accounting, as well as certifications such as:
- Certified Financial Planner (CFP)
- Chartered Financial Analyst (CFA)
- Personal Financial Specialist (PFS)
- Certified Public Accountant (CPA)
Are All Financial Advisers Fiduciaries?
Not all financial advisers are fiduciaries, although many are. You can ask a potential financial adviser if they act as a fiduciary and if they are willing to sign an agreement of fiduciary responsibility. You can also check the financial adviser's status on the SEC adviser search tool.
If you work with a financial adviser who is not a fiduciary, they may recommend investments that pay them a commission or push you into investments where you could lose significant capital. For that reason, always choose a financial adviser fiduciary or fiduciary financial planner to protect your assets and interests.
Comparing a Fiduciary vs. a Financial Adviser
Fiduciaries and financial advisers have key differences in standard of care, oversight and compensation. Learn the differences between a fiduciary vs. a financial adviser so you can protect yourself.
Fiduciary Duty
Fiduciary: A fiduciary has a legal obligation to act in the best interests of their clients or beneficiaries. They must prioritize their client's interests above their own and avoid conflicts of interest.
Financial adviser: A financial adviser may or may not have a fiduciary duty. Some financial advisers operate under a fiduciary standard, meaning they have a legal obligation to act in the best interests of their clients. Others may operate under a suitability standard, meaning they must recommend products that suit their clients but not necessarily the best option. This can present a conflict of interest or lead to losses.
Scope of Services
Fiduciary: A fiduciary can provide a wide range of services, including financial planning, investment management, estate planning and tax advice. A fiduciary can be any type of financial adviser, although their focus is usually on providing comprehensive and holistic financial guidance to clients.
Financial adviser: A financial adviser may offer various services depending on their specialization. This can include investment advice, retirement planning, insurance planning, debt management, budgeting or specific areas of expertise.
Compensation Structure
Fiduciary: Fiduciaries typically charge a fee based on a percentage of the assets they manage (AUM fee), an hourly rate or a fixed fee for their services. This fee structure aligns their interests with the clients' and avoids potential conflicts of interest.
Financial adviser: Financial advisers may charge fees, such as an AUM fee, commissions on product sales or a combination of both. It is important to clarify how financial advisers are compensated and whether they receive third-party incentives.
Regulatory Oversight
Fiduciary: Fiduciaries, especially those operating as investment advisers, are subject to regulatory oversight by entities such as the Securities and Exchange Commission (SEC) in the United States. They must register and comply with regulatory requirements to maintain their fiduciary status.
Financial adviser: Financial advisers can operate under different regulatory frameworks depending on their jurisdiction and services. They may need to register with relevant regulatory authorities or comply with specific regulations, such as licensing requirements.
Standard of Care
Fiduciary: Fiduciaries have a higher standard of care and must act in a manner that meets the best interests of their clients. They are expected to provide thorough analysis, disclose conflicts of interest and act with prudence and diligence.
Financial adviser: Financial advisers are expected to provide suitable advice and recommendations to their clients based on their financial situation, goals and risk tolerance. The suitability standard requires them to believe their recommendations meet their clients' needs reasonably, but it may not be as stringent as the fiduciary standard.
Choosing a Fiduciary Financial Planner
Should you choose a fiduciary vs. financial adviser? For many people, the answer is both. When working with any finance professional, first confirm they are a fiduciary. This will protect your assets and your interests. Many financial planners, financial advisers and investment advisers work as fiduciaries. These professionals maintain high ethical business standards to help you achieve financial goals. Learn more about fiduciary financial advisers or the Certified Financial Fiduciary designation and find some of the best financial advisers here.
Frequently Asked Questions
What is the main difference between a fiduciary and a financial adviser?
The main difference between a fiduciary is that a fiduciary is legally required to act in the best interest of their client, while a non-fiduciary financial adviser may give useful advice that isn’t necessarily the best recommendation to meet a client’s needs.
How can I determine if a financial adviser is a fiduciary?
The SEC has an adviser search tool where you can search for fiduciary advisers. Fiduciary firms have a Form ADV Part 2A filing available online. You can also ask a financial adviser if they act as a fiduciary on behalf of clients and if they’re willing to sign an agreement of fiduciary responsibility.
Why should I choose a financial adviser who is a fiduciary?
You should choose a financial adviser who is a fiduciary to guarantee that they will act in your best financial interests and don’t operate with a conflict of interest.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.