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It’s easy to get tripped up when it comes to the world of financial advisors, and distinguishing fiduciaries from non-fiduciaries can be challenging. But when you’re looking for financial advice, then having a fiduciary on your side can help you get the expertise and direction that’s best for your situation, making it a better fit than a financial advisor who is not a fiduciary.
Here are the differences between a fiduciary and a financial advisor and what you need to know.
What is a fiduciary?
A fiduciary is someone in a position of trust over the affairs of another. It comes from the Latin word fiduci, which means trust. A fiduciary is bound by law or oath to put their client’s interest ahead of their own, meaning those who engage a fiduciary should be able to fully trust them.
A fiduciary could be anyone with expertise – such as a lawyer, trustee or financial advisor – who must advise a client on the best way to proceed or otherwise act on their behalf.
What is a financial advisor?
A financial advisor provides a range of advice and services around your financial life, including planning for retirement, managing your investments, preparing a budget, estate planning and much more. A financial advisor can construct a financial plan to help you grow your wealth.
Financial advisor is a catch-all term that includes many different kinds of advisors, such as those focused on specific areas such as investment advisors or wealth managers, or those with specific certifications such as those holding a certified financial planner (CFP) credential. The term may even include salespeople acting in the interest of a large financial institution that is looking to sell potential clients on the benefits of their products and services.
What is the difference between a financial advisor and fiduciary?
The roles of a fiduciary and a financial advisor may overlap in some ways, but may be dissimilar in other key dimensions. Here are a few of the biggest differences:
- Duty of care
- A fiduciary has a high duty of care for clients, meaning that a fiduciary must always put a client's interests ahead of their own. In contrast, a financial advisor may only have to act according to a suitability standard, meaning that advice or products must be suitable to clients, rather than the best for their individual financial situation.
- Area of practice
- A fiduciary is a term that crosses domains, meaning that it can be used in areas besides finance. For example, lawyers are fiduciaries, as are the directors of a corporation, relative to its shareholders. In contrast, financial advisors concern themselves with issues related to assisting individuals in managing their money.
- A financial fiduciary need not cost more than a financial advisor. Financial advisors may be paid a flat fee per job, an hourly rate or a percentage of assets under management. In contrast, a fiduciary may be more likely to be paid in a way that helps align incentives. For example, many financial advisors are fee-only fiduciaries, meaning they accept only fees paid by their clients, rather than have potential conflicts of interest by receiving sales commissions from big financial companies or others.
Want the best financial advice? Your best bet is to find an advisor who will work in your best interest – a fiduciary – and align them with an incentive structure to do so (such as fee-only). Bankrate’s advisor matching tool can get you started with an advisor in your area in minutes.
How to know if a financial advisor is a fiduciary
If you’re looking for a financial advisor who is also a fiduciary, the simplest way to find out is to just ask the advisor. If the response is anything other than an emphatic “yes,” then the advisor is not truly a fiduciary advisor. Ask the advisor to put it in writing, and if they’re unwilling to do so, then you know the advisor will not act as a fiduciary. The fiduciary standard entails certain obligations on the advisor that a non-fiduciary does not want to be held to.
The fiduciary question is one of the most important questions you can ask an advisor. Right behind that is asking how the advisor gets paid, because an advisor’s compensation structure shows whether they likely have a financial conflict of interest underlying the advisor’s decisions. You’ll want to be extra careful around so-called advisors who are not paid only by clients’ fees.
However, even with a fiduciary standard and the right alignment of incentives, you may still end up with an advisor who doesn’t do right by clients. So it can be useful to ask friends or colleagues if they have a properly aligned advisor and then meet with the potential advisor about your needs.
In addition, while it’s important to have a trustworthy advisor, clients must understand what the advisor is doing and why. Great advisors want their clients to understand what’s going on and why it makes sense for their life situation. So ask questions.
Do I need a financial advisor or fiduciary?
If you’re making big decisions that affect your financial security, then you need a fiduciary advisor to give you the best chance at unbiased advice. If you work with an advisor who is really a salesperson in disguise, you may end up with a financial product that is confusing and ends up costing you tens of thousands of dollars or more over your lifetime. While such salespeople may seem cheap now, they can end up costing you much more later.
Of course, working with a non-fiduciary advisor doesn’t mean you won’t get the best advice sometimes, but rather that you can’t count on getting the best advice all the time. And getting the best advice all the time is what matters. Without a fiduciary standard, you know which way a misaligned non-fiduciary advisor will act when it comes to their enrichment or yours – theirs.
Here are six tips for finding the right financial advisor for you and what to watch out for.
Making sure your financial advisor is truly a fiduciary is one of the best steps to receiving the best advice you can get. But it’s also important to consider how the advisor is compensated to get a fuller picture of how the advisor is aligned – or not – with your best interest.