What is a Fiduciary Financial Advisor?

Personal Finance

Jan 29

Understanding the fiduciary standard is crucial for people looking to make informed decisions about their financial future. In this article, we’ll explore what it means to work with a fiduciary financial advisor, the benefits of related services, and how to choose one that’s right for you.

What is a fiduciary financial advisor?

A fiduciary financial advisor is a financial professional who is legally and ethically bound to act in the best interests of clients. Unlike other financial advisors who may operate under a "suitability standard”—meaning they must recommend products that are appropriate for a client’s needs—a fiduciary is held to a higher standard of care. This responsibility means they must prioritize their clients' interests above their own and disclose any potential conflicts of interest that could affect their recommendations.

Fiduciary financial advisors are required to provide advice that is objective and based solely on what is best for the client, whether with respect to choosing investments, planning for retirement, or managing risk. They are often compensated via a fee-only structure, which can include hourly rates, flat fees, or a percentage of assets under management: a model that helps minimize conflicts of interest, as fiduciary advisors don’t earn commissions from the products they recommend.

The fiduciary duty also encompasses transparency and full disclosure; advisors must provide clear, upfront information about how they are compensated and any affiliations they may have with financial institutions.

Fiduciary financial advisor vs financial advisor

A financial advisor is a broad term that extends to professionals who provide various financial services spanning investment advice, retirement planning, estate planning, and tax strategy. Not all financial advisors are fiduciaries, meaning they’re not all legally bound to act in the best interests of their clients.

A fiduciary, meanwhile, is a type of financial advisor held to a fiduciary standard mandating he/she prioritize the client’s financial well-being above his/her own, avoid conflicts of interest, and provide full transparency in recommendations.

This isn’t to say other types of financial advisors don’t act in the best interests of their clients, but unlike fiduciaries, they’re not legally required to do so.

Let’s take a look at two different types of financial advisors and the standards of care they must provide to their clients.

Registered investment advisors (RIAs) vs. broker-dealers (B/Ds)

Two common types of financial advisors are registered investment advisors (RIAs) and broker-dealers (B/Ds). RIAs, firms or individuals registered with either the Securities and Exchange Commission (SEC) or state regulators, operate under the fiduciary standard (and are thus legally obligated to act in the best interests of their clients) and offer personalized financial planning and investment management services—often taking a holistic approach to a client’s financial situation. Due to their fiduciary duty, RIAs are required to provide advice that is objective, unbiased, and tailored to the client’s unique financial goals and circumstances.

Broker-dealers, meanwhile, are financial professionals or firms that buy and sell securities on behalf of their clients. Unlike RIAs, they operate under the "suitability standard” that requires they recommend products suitable for clients based on their financial situation and objectives. Broker-dealers often earn commissions or fees based on the products they sell such as mutual funds, insurance products, or individual stocks and bonds.

The difference between “suitable” and “best” for a client may sound vague, so here’s how that plays out in more concrete terms…

Let’s say a broker-dealer has two potential products, both of which are “suitable” for a client. While Product A earns the advisor a commission, Product B is better for the client. The advisor goes on to recommend Product A, earning a commission and doing nothing wrong from a legal standpoint in the process.

On the other hand, with RIAs typically not earning commissions on any products, they wouldn’t face this type of situation in the first place; but theoretically if they did, they’d be legally obligated to suggest Product B: the best option for the client.

Dual-registered advisors

Some advisors are “dual-registered,” making it particularly tricky for investors to know how to move forward. In this case, advisors sometimes act as an RIA and other times as a broker-dealer but can honestly answer “Yes” if asked about their fiduciary status; wearing their RIA “hat,” they act as a fiduciary but then take this off as a B/D no longer required to abide by that standard. Hence, it’s important to ask not only if your advisor is a fiduciary but also if he/she is bound by those duties 100% of the time.

How to find a fiduciary financial advisor

When choosing a financial advisor, it’s important to consider the level of care and loyalty you expect. An RIA, bound by his/her fiduciary duty, may provide more transparent, unbiased advice and focus solely on what’s best for you. On the other hand, a broker-dealer may offer a broader range of financial products with recommendations influenced by compensation structure. If you’d prefer to work with a financial advisor who’s legally obligated to prioritize your financial well-being, enlist the help of this step-by-step guide to find one…

1. Understand the fiduciary standard.

Before beginning your search, it’s important to familiarize yourself with what the fiduciary standard entails: understanding terms and key principles so you can properly identify advisors who truly meet the fiduciary standard.

2. Seek out registered investment advisors (RIAs).

One of the most reliable ways to find a fiduciary financial advisor is to look for registered investment advisors (RIAs) who are registered with the Securities and Exchange Commission (SEC) or state regulators and bound by fiduciary duty. They typically offer fee-only services, meaning they don’t earn commissions on financial products: reducing potential conflicts of interest.

You can search for RIAs on the SEC’s Investment Adviser Public Disclosure (IAPD) website, checking an advisor’s registration status, professional background, and disciplinary history.

3. Examine disclosure documents.

Review your advisor’s Form ADV, a document all RIAs must file with the SEC that provides detailed information about his/her business practices, fees, and any potential conflicts of interest. It’s a valuable resource for understanding whether your advisor is committed to acting as a fiduciary.

4. Inquire about fiduciary responsibility and fee structure.

When interviewing potential financial advisors, it’s important to ask direct questions about whether they operate under a fiduciary standard. Some advisors may only act as fiduciaries in some situations (such as in the dual-registered situation discussed above), so make sure you ask if they always act as a fiduciary; anything other than a resounding “yes” is a “no.”

You should also inquire about the advisor’s fee structure. Fee-only advisors, who charge a flat fee, hourly rate, or percentage of assets under management, are more likely to be fiduciaries. Be wary of advisors who earn commissions or have complex compensation models that could yield conflicts of interest.

5. Verify credentials and experience.

Seek out advisors with recognized credentials that emphasize fiduciary responsibility and financial planning expertise. Some of the top credentials to consider include:

Certified Financial Planner (CFP®): CFP professionals must adhere to a fiduciary standard after completing extensive education and examination requirements.

Chartered Financial Analyst (CFA®): CFAs are known for their deep knowledge of investment management and also adhere to a code of ethics that includes acting in clients’ best interests.

NAPFA-affiliated financial advisor: A financial advisor allied with the National Association of Personal Financial Advisors (NAPFA) is required to be a fiduciary.

Also consider the advisor’s experience and track record; a solid history of working with clients who have similar financial goals and circumstances as your own can breed valuable insights and guidance.

6. Trust your instincts.

Finding the right fiduciary financial advisor isn’t just about credentials and qualifications; it’s also about finding someone you trust and feel comfortable with. During initial meetings, assess whether the advisor listens to your concerns, understands your financial goals, and communicates clearly. A good advisor will take the time necessary to build a relationship based on trust and transparency.

The takeaway

Working with a fiduciary financial advisor can offer peace of mind, assuring clients their advisor is committed to providing advice that truly aligns with their financial goals and best interests. Whether you’re seeking help with investment strategies, retirement planning, or overall financial management, you can work toward securing your financial future by choosing a fiduciary advisor.

The Vision Retirement team is comprised of independent RIAs held to a fiduciary standard of care. Schedule a FREE discovery call with one of our CFP® professionals today.