A fiduciary makes a legal commitment to providing clients impartial and informed guidance on their money. One would hope that anyone holding themselves out to be a fiduciary is, in fact, meeting this standard. Unfortunately, it’s not as simple as financial advisor = fiduciary.
Traditionally, “financial advisor” has been used to describe a range of professionals in the financial services industry, from stock brokers to wealth managers. The Securities and Exchange Commission (SEC) now restricts who can refer to themselves as an “advisor” (or “adviser,” an alternate spelling that’s primarily used in legalese.) Professionals who give investment advice are permitted to use the title if they’re a registered investment adviser, which requires them to adhere to a fiduciary duty.
Whether you’re unsure about a particular financial advisor who claims to be a fiduciary or you’re simply performing your due diligence, here are steps to take to verify a professional’s fiduciary status before trusting them with your money.
Anyone registered with the SEC or a state regulator as an investment advisor-technically called an investment advisor representative or IAR-is a fiduciary. These professionals are employed by or associated with a registered firm, allowing them to offer financial advice and manage investments for compensation.
Fiduciaries have a legal and/or ethical duty to put their clients’ interests ahead of their interests. They must always prioritize advice that benefits clients, not advice that benefits themselves or their firm.
(If you’re looking for a fiduciary financial advisor, this free matching tool can connect you with fiduciaries who serve your area.)
The fiduciary standard is upheld by the duties of care, loyalty and disclosure. When fiduciaries make recommendations to clients, they should do so only after analyzing all of the available information and communicating any potential conflicts of interest. A breach of these duties can result in sanctions against the professional, such as temporarily barring them from practicing or permanently revoking their license.
Financial advisors who are not fiduciaries might also act with loyalty and care (I would hope they do!) but they’re not legally obligated to abide by those principles at all times. This is where it gets tricky.
Non-fiduciary professionals follow Regulation Best Interest (Reg BI) rules. Implemented in 2020 by the SEC, Reg BI expanded protections for investors above and beyond FINRA’s longstanding suitability standard, which said advisor recommendations simply had to be “suitable” for the client. It’s a step in the right direction, but it still falls short of the fiduciary standard.
Broker-dealers, firms that buy and sell securities, are subject to Reg BI rules. These essentially require the professionals to act in the best interest of clients (not themselves or their firms) onlywhen making investment strategy recommendations, namely those related to account types and securities. In other words, they can determine whether something is in a client’s best interest in the context of a single transaction, rather than in the context of the entire relationship, as fiduciaries do. Household names like Charles Schwab, Wells Fargo and Bank of America Merrill Lynch all fall under this umbrella.
Your financial advisor may be dual registered as an IAR and broker-dealer. In this case, the set of factors used to determine a “best interest” recommendation broadens, and they have to attempt to gain a complete understanding of your financial situation, goals and risk tolerance; consider alternative investment options and accounts from outside their firm; and provide ongoing advisory services. No such requirements exist for professionals registered solely as broker-dealers, which can make some clients doubt whether they’re receiving truly conflict-free advice.
You can easily confirm an advisor’s registration status via a searchable database on the SEC website. You’ll also see what other professional credentials they hold, such as Series 65, Certified Financial Planner
™
(CFP®), Chartered Financial Analyst (CFA), certified investment management analyst (CIMA) or chartered financial consultant (ChFC). The organizations that grant these marks have their own versions of a fiduciary standard, which I’d encourage you to read for more clarity. You can find them by searching the license type + fiduciary (for example, CFP® + fiduciary).
Another potential indicator of an advisor’s fiduciary status is their compensation model. “Fee-only” advisors don’t accept commissions, kickbacks, referral fees or any other type of compensation that could introduce a conflict of interest. Instead, they earn fees only from clients and commit to a fiduciary responsibility to act in their best interest throughout the engagement. “Fee-based” advisors earn extra money from third parties when they recommend certain financial products, which may or may not be the best choice for a client.
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I know this can seem like a lot to consider, whether you’re seeking help to establish a comprehensive financial plan or just want some quick advice on investment options. If you’re overwhelmed, just remember this: It’s worth the due diligence to confirm your advisor’s fiduciary status. You’ll find peace of mind and confidence knowing the person charged with handling your financial affairs meets the highest standard.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Familiarize yourself with the various fee structures that financial advisors can operate under. Most charge a fee that’s based on a percentage of your assets under management (AUM), but some may charge flat or fixed fees for standalone services, like the creation of a financial plan. Be sure to understand how your advisor’s fee is structured and what you can expect to pay.
Tanza Loudenback, CFP® is a financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Tanza is not an employee of SmartAsset and is not a participant in SmartAsset AMP. She has been compensated for this article.Some reader-submitted questions are edited for clarity or brevity.
