What Is a Fiduciary, and Do I Need One?

Fiduciaries’ responsibilities are to act in clients’ best interest at all times, provide clear and timely reports, disclose any conflicts of interest, execute orders promptly, and charge reasonable fees. 

It’s a confusing landscape. What’s potentially confusing to investors is that the title “advisor” isn’t synonymous with fiduciary. The title is used broadly by brokers and other financial professionals, whether they are fiduciaries or not. 

Also confusing: A relatively new Securities and Exchange Commission regulation requires brokers to act in clients’ best interest, even though it does not hold them to a true fiduciary standard of care.

The only type of advisor legally bound to behave as a fiduciary is a registered investment advisor (RIA). RIAs must register either with a state securities agency or the SEC, depending on the size of their assets under management.

But even with RIAs, there are nuances to how the fiduciary designation applies. The SEC only requires that RIAs behave as fiduciaries when it comes to investments, not other aspects of financial planning. 

Advisors with a CFP designation from the Certified Financial Planner Board of Standards agree to a fiduciary standard under certification requirements. The standard is broader than for RIAs, applying to all CFP services, but it isn’t legally enforced. 

“Where things get more confusing is when the same investment representative is sometimes a fiduciary and sometimes a broker,” says Knut Rostad, president of the Institute for the Fiduciary Standard. He points out that dual registrations, allowing an advisor to wear the hats of RIA and broker, have been on the rise in recent years. 

Payment structures can be revealing. Fiduciary advisors generally charge an annual fee—which removes the incentive to sell one product over another. Nonfiduciaries usually get paid commissions per transaction.

But this isn’t a hard-and-fast rule, Knut says. Nonfiduciaries can charge a fee and fiduciaries can collect a commission. 

Not everyone needs a fiduciary. While the fiduciary designation is a good sign of an advisor’s good intentions, many nonfiduciaries have long and trusting relationships with clients and may be a better fit for your financial needs.

Fiduciaries typically charge a percentage of assets annually. Clients with straightforward circumstances may be satisfied—and pay less over time—with  commission-based services.

Fiduciary advisors evolved recently. The fact that not all advisors are required to put clients’ interests first may come as a surprise, but the widespread prevalence of fiduciary advisors is a fairly recent development. Prior to the mid-1990s, brokers provided most financial services for individuals. 

Gradually, some financial professionals sought to distinguish themselves from the transaction-based model and establish long-term trusted advisory relationships with clients. Many replaced the commission-based payment models with fees to avoid conflicts of interest and became agnostic about what investments or financial solutions they recommended.

The value proposition of the fee-based full-service financial advisory model resonated with investors and prompted many advisors to further distinguish themselves with a commitment to the fiduciary standard.

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