What Is a Fiduciary Financial Advisor? – Forbes Advisor – Technologist

Not all financial advisors are created equal. Nearly anyone can give financial advice, but how do you know that the advice they’re giving you is reliable and best fits your needs? When entrusting a professional with your life’s savings, how can you ensure their recommendations are right for you and not just the option that earns your advisor the most? 

Making sure that your financial advisor is a fiduciary is a great place to start. A fiduciary financial advisor is a financial advisor who is legally and ethically bound by fiduciary duty to serve in your best interests. 

What Is a Fiduciary?

A fiduciary refers to a professional that is required by law to act in their clients’ best interest. The professionals usually manage assets, such as an investment portfolio or property, for their clients. These professionals can range from financial advisors to lawyers, estate executors and real estate agents.

Because fiduciaries work in their clients’ best interests, they can only recommend financial strategies that fully benefit a specific client’s economic situation. Fiduciaries are also required to avoid and disclose any conflicts of interest to their clients, such as profiting at a client’s expense.

Fiduciaries have two main duties while managing money:

1. Duty of care. Under this, fiduciaries are required to make informed business decisions by reviewing all of the available information about your financial life before making recommendations or plans.
2. Duty of loyalty. This refers to the requirement that a fiduciary not use their position to further their interests, such as making financial product recommendations they may make a commission on.

What is a Fiduciary Advisor?

A fiduciary advisor is a financial professional who is legally and ethically bound to act in the interests of their clients. Fiduciary advisors must prioritize the needs of their clients above their own needs.

This means that they are supposed to recommend investments and products based solely on your needs, not what will net them the greatest commission, referral kickback or fees. Fiduciary advisors are legally obligated to disclose any potential conflicts of interest they may have.

Are All Financial Advisors Considered Fiduciaries?

You might think anyone allowed to manage your money must be a fiduciary—but not all financial advisors fall under this standard. 

Historically, there were no fiduciary requirements for any advisors, but that changed a few years ago. In 2020, Regulation BI from the Securities and Exchange Commission (SEC) went into effect for broker-dealers and their investment professionals. This regulation requires broker-dealers to disclose all data possible when recommending investments, disclose conflicts of interest, exercise reasonable care and serve in their client’s best interests. 

Even though this regulation exists now, it doesn’t mean that all financial advisors are automatically fiduciaries. Not all financial advisors are broker-dealers — and this law only applies to broker-dealers when they’re making recommendations on investments. 

Financial advisors are involved in every aspect of a client’s financial life, not just their investments. Other financial products like life insurance and annuities can come with hefty commissions for the advisor.  If your advisor isn’t a fiduciary, they could be more likely to recommend products that will net them the most income, not the ones that are the best for your situation. 

Working with a fiduciary financial advisor isn’t a guarantee that you’ll get perfect advice, but it does make it more likely that you’ll receive advice based on what’s best for your wallet, not your advisor’s.

Related: Find A Financial Advisor In 3 minutes

Is a Robo-advisor a Fiduciary?

The rise of robo-advisors has made financial planning cheaper and widely accessible to consumers. A robo-advisor refers to an automated software system that uses algorithms to build and manage a portfolio for you. Additionally, many robo-advisors are registered as advisors with the Securities and Exchange Commission (SEC) which means they have a fiduciary duty to their clients.

However, since robo-advisors are automated systems, some financial professionals argue that they’re unable to be considered fiduciaries. They’re unable to create custom financial plans based on a customer’s unique personal situation, so it can be hard to determine if they’re recommending the best possible investment plan or products. You should keep these caveats in mind if you opt to use a robo-advisor.

What Happens If Fiduciary Duty Is Breached?

There are consequences if a fiduciary breaches their duty of acting in their clients’ best interest. This can mean the advisor did something as severe as trading investments without their client’s authorization or something as simple as failing to disclose any conflicts of interest associated with investments. Breaches can also come from making excessive trades from a client account to earn commissions or even using money in a client’s account to buy securities for themselves.

If you think your financial advisor breached their fiduciary duty, you’ll want to end the relationship immediately. If you experienced damages due to the breach of fiduciary duty, you may be able to file a civil claim to recoup those damages. Filing a claim will require proof that your advisor is a fiduciary, they breached their duty of care and you incurred damages due to the breach.

If your claim is successful, you may be awarded damages. The advisor will face disciplinary action, such as being ordered to pay a fine. They will also have disciplinary action added to their record, which can damage their reputation and career. You can review a fiduciary financial advisor’s disciplinary action through BrokerCheck.

How Do I Find a Fiduciary Financial Advisor?

Now that you understand the importance of working with a fiduciary financial advisor, you may want to start working with one as soon as you can. Finding one near you can be simplified by using one of the many available databases.

Many financial planning associations offer databases of financial advisors, free of charge, including:

If you find a financial advisor you’re interested in working with, ask if they are a fiduciary and if they are always acting as a fiduciary (some fee-based advisors don’t act as fiduciaries while selling commission-based products).

It’s also important to understand how the financial advisor will make money. Most fiduciary financial advisors are fee-only or fee-based, meaning they may charge by the hour, by the plan or through a subscription model.

How Do I Know If My Advisor Is A Fiduciary?

The easiest way to find out if your financial advisor is a fiduciary is to ask them. You can also use FINRA’s BrokerCheck database to look up your advisor and verify that they are registered with the SEC. An additional way to verify an advisor’s fiduciary status is to review the disclosure forms they are required to give you.

When choosing an advisor, looking for someone with credentials can help verify that you’re working with someone who has undergone extensive training, passed thorough examinations and belongs to an organization that requires them to adhere to professional standards. In addition to being a fiduciary, look for designations like Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Personal Financial Specialist (PFS) and membership in organizations like the National Association of Personal Financial Advisors (NAPFA).