Fiduciary: Definition and Examples

A fiduciary is an individual or entity that acts on behalf of another person or group. Whether they are financial advisors, lawyers or trustees, fiduciaries assume a legal and ethical responsibility to act in the best interests of a specific person. It’s important to understand what makes a person a fiduciary, especially when searching for a financial advisor to provide investment advice.

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Understanding Fiduciary Duty

While financial advisors are not the only professionals who can act as fiduciaries, the Investment Advisers Act of 1940 first introduced the concept of fiduciary duty, or the legal obligation that advisors have to their clients. ¹

However, the 1940 law did not clearly define fiduciary duty, prompting the U.S. Securities and Exchange Commission to issue an official interpretation of the term in 2010. ²

According to the SEC, a fiduciary advisor must “adopt the principal’s goals, objectives or ends,” and exercise duty of care and duty of loyalty.

In simplest terms, a fiduciary is responsible for acting in a client’s best interests at all times. “In our view, an investment adviser’s obligation to act in the best interest of its client is an overarching principle that encompasses both the duty of care and the duty of loyalty.”

What Is a Fiduciary Financial Advisor?

All investment advisors registered with the SEC or a state regulatory agency are required to act as fiduciaries. ³

To meet the duty of care component of the fiduciary standard, advisors must fulfill three primary requirements.

• Act in the best interest of the client. To truly act in the client’s best interests, a fiduciary advisor must have a reasonable understanding of the client’s objectives. This means understanding the investment profile, such as risk tolerance and time horizon, of retail clients and the investment mandate of institutional clients, such as a pension or retirement plan.
• Seek the best execution of transactions for the client. Duty of care also includes an advisor’s obligation to execute transactions to maximize proceeds and minimize costs. In seeking the best execution of transactions, an advisor must consider a broker-dealer’s commission rate, the value of their research and the brokerage’s financial responsibility and responsiveness.
• Provide advice and monitoring. A fiduciary advisor has an ongoing duty to provide monitoring and advice, especially when compensation includes a periodic asset-based fee.

For a fiduciary financial advisor to fulfill their duty of loyalty, they must put the client’s interests ahead of their own. This means when a potential conflict of interest exists, the advisor has a responsibility to disclose it.

For instance, some financial advisors are also licensed insurance agents or broker-dealer representatives who earn commissions for certain policies or products to advisory clients. This creates a conflict of interest, as the advisor has a financial incentive to recommend specific products or services, even when more suitable alternatives may exist.

By having full and fair disclosure of conflicts of interest that could consciously or unconsciously affect an advisor’s advice, clients can better evaluate their advisory relationships.

Fiduciary Duty vs. Suitability Standard

It’s important to note that SEC-registered financial advisors are held to a higher standard than stockbrokers.

While advisors must abide by fiduciary duty, brokers must follow the suitability standard. ⁴ This is a Financial Industry Regulatory Authority (FINRA) requirement that investments need only be suitable to an investor’s circumstances. It may allow a broker to recommend investments that generate higher commissions than similar low-priced options.

However, the suitability standard was overhauled in 2020 when the SEC began requiring brokers to follow a best interest standard ⁵ . While it does raise the standards that stockbrokers and investment dealers must meet, it does not protect investors as well as the fiduciary standard.

Other Types of Fiduciary Relationships

The term fiduciary often refers to the financial best interests of a person or entity. A fiduciary duty exists whenever a consumer places their financial or legal trust in another person.

However, there are many kinds of fiduciary relationships beyond those between financial advisors and their clients: 

• Attorney. An attorney has a fiduciary obligation to serve his or her client’s best legal and financial interests.
• Real estate agent. In real estate, an agent must disclose all relevant facts to their client, present all offers to the client and abstain from representing both parties in a transaction.
• Trustee. A trustee is responsible for managing a trust. They also have a fiduciary duty to the needs of the trust’s beneficiaries ahead of their own interests.
• Board of a company. The board of a company has a similar obligation to steer the company in a way that benefits shareholders, not itself.

How to Verify That Your Financial Advisor Is a Fiduciary

The title of financial advisor carries no legal definition, which means almost anyone can use it, regardless of how their registeration. It only takes a few steps to determine if your financial advisor is a fiduciary.

You can visit the SEC’s Investment Adviser Public Disclosure database at adviserinfo.sec.gov to check an advisor’s registration as an investment adviser. Registered investment advisers are subject to fiduciary duty under the Investment Advisers Act of 1940.

To find a fiduciary financial advisor, you can:

• Search by the advisor’s name or firm
• Review their registration status
• Check their Form ADV Part 2 disclosure brochure for disciplinary actions filed against them

FINRA BrokerCheck at brokercheck.finra.org covers broker-dealers and their registered representatives. If an advisor is registered as a broker-dealer representative, either in addition to or in place of an investment adviser, they operate under the best interest standard rather than the full fiduciary standard in that capacity. BrokerCheck shows the advisor’s registration history, licenses held and any complaints or regulatory actions on record.

One of the more common sources of confusion is the dual-registered advisor. This is someone who holds both an investment adviser registration and a broker-dealer license.

In this situation, fiduciary duty may apply when providing investment advice. However, they must only follow the best interest standard when recommending certain products such as insurance or annuities.

The shift between standards is not always get communicated clearly to clients. Reviewing the advisor’s Form ADV Part 2, which they must provide to all clients, will describe available services, their fee structure and any conflicts of interest.

Professional designations can also signal fiduciary obligations, though they vary. CFP professionals are required to act as fiduciaries in all financial planning engagements under the CFP Board’s standards. ⁶

The CFP Board maintains a public disciplinary history at cfp.net where you can confirm an advisor’s certification status and whether they have any sanctions.

Questions to Ask a Financial Advisor About Their Fiduciary Status

Checking databases is the objective part of due diligence. Taking the time to ask your advisor questions reveals whether they can explain their obligations clearly and honestly. These questions cut through ambiguous language quickly.

Are You a Fiduciary?

Ask whether they are a fiduciary at all times and in all capacities, which is what you want.

An advisor who hedges or says they are a fiduciary only in some situations is a red flag. Ask exactly when the fiduciary standard applies and when it does not.

What is Your Compensation Structure?

Ask whether they receive any form of payment beyond the fees you pay directly.

Fee-only advisors collect no commissions from third parties, but they may receive both client fees and commissions. This does not disqualify them from fiduciary status but does create conflicts they must disclose.

Do You Have Prior Regulatory Issues?

Ask whether they have ever been subject to a regulatory action, client complaint or disciplinary proceeding.

A candid advisor will acknowledge anything in their public record and explain the context. An evasive or dismissive response to this question is a meaningful signal on its own.

Will They Provide a Written Agreement?

Ask them to put their fiduciary commitment in writing. Some advisors will include a fiduciary oath or explicit fiduciary language in their client agreement, but others may not.

The absence of written commitment is not necessarily a problem, but asking the question reveals how direct the advisor will be about their obligations to you.

Bottom Line

A fiduciary is a person or group that acts on behalf of another person or entity. Financial advisors registered with the SEC or state regulators are bound by fiduciary duty. This means they must put their clients’ interests before their own and disclose any potential conflicts of interest.

Financial advisors aren’t the only kind of fiduciary, though. Lawyers, real estate agents, trustees and company boards all have fiduciary relationships with their clients or beneficiaries.

Tips for Hiring a Financial Advisor

• Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Familiarize yourself with the differences between fee-only and fee-based advisors. While fee-only advisors make money solely from the advisory fees they charge their clients, fee-based advisors may earn commissions for recommending products and services in addition to asset-based advisory fees. Commission-based compensation can create a conflict of interest, so it’s worthwhile finding out whether an advisor works on a fee-only basis or can earn commissions.

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