Would you resolve a legal dispute without hiring a lawyer? Or perform complicated bookkeeping without an accountant? So why handle financial planning on your own? It’s just as important, yet many overlook this. If you’re serious about securing your financial future, it’s wise to consult an expert – and not just any expert, but a fiduciary financial advisor. The term “fiduciary” has gained attention in recent years, often associated with financial advisors. But there’s more to it than meets the eye. So, what exactly is a fiduciary, how do they differ from a typical financial advisor, and how can you find one? Here’s everything you need to know to invest wisely.
What Is a Fiduciary?
A fiduciary is someone legally required to act in your best financial interests, even above their own. While a fiduciary might be a financial advisor, there are distinct differences to understand. Fiduciaries must evaluate your financial situation fully and recommend the best and most efficient investment options. This is called fiduciary duty – a higher standard than what typical financial advisors follow.
Fiduciaries include estate executors, trustees, attorneys, accountants, corporate officers, and board members. Even some bankers and brokers can be fiduciaries, depending on the context. While financial advisors may operate under a fiduciary duty, this only applies in certain cases.
Financial Advisors vs. Fiduciaries
Financial advisors offer general financial advice, yet the only requirement is that their suggestions are “suitable” for you. Traditional advisors, like brokers, may receive commissions for selling certain stocks or funds, which can create incentives that aren’t always in your best interest. Additionally, there’s little regulation around the fees or commissions they can charge, making the distinction between a fiduciary and financial advisor especially significant.
Fiduciary Duty Explained
Fiduciary duty is the legal obligation to prioritize your best interests. This duty ensures no conflict of interest exists between an advisor and their client and that they earn only what you pay them. Corporate directors, for example, owe their shareholders three primary duties:
- Duty of Care – Thorough decision-making with due diligence.
- Duty of Loyalty – Acting in the company’s, not personal, interests.
- Duty of Good Faith – Being honest and fair.
These principles are also required in fiduciary relationships, alongside others like Duty of Disclosure (revealing material facts) and Duty of Obedience (complying with organizational rules). For fiduciaries, duty is key to ensuring clients receive the best, unbiased advice.
What Is a Fiduciary Financial Advisor?
A fiduciary financial advisor operates independently, not beholden to a company’s agenda. They aren’t brokers selling products; instead, they’re legally bound to prioritize your interests and disclose any potential conflicts. Fiduciary advisors often hold roles such as certified financial planners, investment advisors, or business and retirement consultants.
The introduction of the DOL Fiduciary Rule and SEC Regulation Best Interest has significantly shifted the industry, raising fiduciary standards for customer service. Gone are the days of commission-based recommendations. Today, fiduciary advisors cultivate close relationships with their clients, providing personalized, interest-aligned advice.
Why You Need a Fiduciary Advisor
Choosing a fiduciary financial advisor means conflict-free advice, a significant benefit given that hidden fees and conflicted advice cost Americans about $17 billion yearly – about 1% of their returns. Though 1% may not sound substantial, eliminating this cost could mean nearly a decade more in retirement savings.
Most fiduciary advisors are paid a flat fee, which removes the incentive to sell products that earn them commission-based income. They focus on client relationships rather than commissions, so your best interests remain the priority. With a fiduciary, you’re one step closer to achieving financial freedom.
How to Find a Fiduciary Financial Advisor
Now that you understand the importance of a fiduciary, here are a few ways to find one:
- Ask Advisors Directly: If you have referrals from friends or family, ask if the advisor is a fiduciary. A true fiduciary operates on a fee-only basis, which they should readily confirm.
- Use a Database: The National Association of Personal Financial Advisors (NAPFA) hosts the largest directory of fee-only advisors across the U.S.
- Seek Recommendations: Many fiduciary advisors work through referrals, so recommendations from trusted contacts can be invaluable.
Once you’ve found potential fiduciaries, prepare questions about their experience and track record. Request Form ADV, the registration form advisors file with the SEC, and don’t hesitate to negotiate fees. Above all, ensure every agreement is in writing.
Working with a fiduciary means gaining advice aligned with your financial goals, conflict-free recommendations, and a commitment to helping you thrive financially.
