What is a Fiduciary Financial Advisor?

SHORT ANSWER: A fiduciary financial advisor is someone who must follow certain rules and regulations when providing investment management and act in the best interest of their customer or client.

As you grow your wealth and look for financial advice, you might be asking what is a fiduciary financial advisor? This professional acts on your behalf and in your best interests to help manage investments and assets. They are to act with integrity and honesty and to adhere to strict legal standards and regulations. Before you hand off your assets to a professional, spend some time getting to know more about these professionals and what they can offer you.

What is a Fiduciary?

A fiduciary financial advisor is a professional who can act on someone else’s behalf. They are to act as though they are the person for whom they are managing assets, which means they should make decisions that are in their client’s best interest.

When a financial professional refers to themselves as a fiduciary, this is generally a good sign because it means they are committed to avoiding conflicts of interest and ensuring transparency. Fiduciaries must act in the following manner:

• Provide accurate, thorough advice and information
• Put their clients' interests first in all that they do but specifically when seeking favorable prices and terms for investments
• Act in good faith and offer relevant information to clients with timeliness
• Disclose potential conflicts of interest to new clients
• Avoid using client assets to benefit themselves in any way

These rules can be summed up into the two duties that fiduciaries have in their role of managing a client’s assets.

• Duty of care: These professionals must make informed decisions through a thorough review of all available information about an investment and the client before recommending an investment.
• Duty of loyalty: Fiduciaries must not use their position for their own interests, such as purchasing a financial product from which they will get a commission if it is not the right investment for the client.

What is a Fiduciary Financial Advisor?

Many people ask what the difference between a fiduciary and a financial advisor is. And that’s a complex question to answer because financial advisors can be fiduciaries, which blurs the lines a bit.

A financial advisor who is not a fiduciary might select investments or products that they receive a commission from, which can sway their decisions to use your assets for their financial gain.

Therefore, the biggest difference between a financial advisor and a fiduciary (even if the fiduciary is both a financial advisor and fiduciary) is that the fiduciary undergoes the scrutiny of ensuring they act in the client’s best interests at all times.

Only 15% of financial advisors are registered as fiduciary investment advisors. That might be because they make flat fees based on how many assets they manage and cannot take commissions for their work.

How Much Does a Fiduciary Financial Advisor Cost?

Fiduciaries charge a flat annual rate for their services. The rate is based on the assets they oversee, often coming to approximately 1% of the total assets per year. The average cost is $2,000-$7,000. However, if you have more than the average amount of assets under management, your fees might be higher. Others charge hourly fees for their services.

Fiduciaries get paid in the form of fees, often pulled directly from the proceeds of the accounts that they manage annually.

Is a Robo-Advisor a Fiduciary?

Whether a robo-advisor is a fiduciary or not depends on whether they are registered with the U.S. Securities and Exchange Commission (SEC). If they are registered, they have a fiduciary responsibility toward their clients.

The challenge with considering a robo-advisor as a fiduciary is that they cannot know their clients as a human asset manager can. Instead, they make decisions based on coding input. They cannot offer broader financial guidance, such as how to manage and pay off debt.

While robo-advisors are less expensive, often charging just 0.05% to 0.25% of assets under management, their programmed decision-making might not be as attractive as having a human advisor who can offer more than just investment decisions. Many robo-advisors cannot consider your full financial picture when deciding where to place your money.

What Happens If Fiduciary Duty Is Breached?

If a fiduciary breaches their duty in acting in the best interests of their client, they are personally liable to make up those losses and give them to their client. Additionally, the fiduciary must return all profits that they made from improperly using their client’s assets.

The fiduciary might be prohibited from acting as a fiduciary in the future. If the case goes to court, the fiduciary might have to pay a penalty of up to 20% of the amount they managed as part of the settlement. The professional could also face criminal prosecution.

How to Find a Fiduciary Financial Advisor

You have a few options for how to find a fiduciary financial advisor. Here’s where to look.

• NAPFA.org: Review a full database of the financial advisors listed and look for an indicator that they are a fiduciary. You can also review their fee structure on this site, which can help in your decision-making.
• SEC: Use the SEC’s advisor search tool. Here, you can review the online filing and see clear descriptions of what they offer as well as the compensation they require for their services.

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Investments With Your Best Interests in Mind

The greatest benefit of working with a fiduciary is knowing that they will be acting with your best interests in mind in all that they do. They should become an extension of your financial decision-making while offering expertise you don’t possess. Get started now with a professional you can trust to oversee your assets and help them grow.