Fiduciary vs. Financial Advisor

When you’re looking for someone to guide you through the world of personal finance, there’s a lot of jargon you have to work through. Financial advisors and fiduciaries are just two of the titles you’re likely to come across, but they are two of the most important and sometimes misunderstood. Here’s a breakdown of how each title applies to the world of financial advice, as well as what makes a fiduciary vs financial advisor.

A financial advisor can help you create a financial plan for your financial needs and goals.

What Is a Fiduciary?

Legally speaking, a fiduciary is someone who acts in the best interest of someone else. Fiduciaries have a bond of trust with another person (called the beneficiary or principal). They also have a legal obligation to act for the beneficiary’s benefit and not their own.

In the context of financial services, this distinction is important. After all, the terms used in financial jargon can often prove confusing. Banks, financial firms and individuals can all serve as fiduciaries. However, not every service or person is bound by law to represent your best interest.

Common examples of fiduciaries are: trustees, corporate officers, attorneys and real estate agents. Certified Financial Planners™ (CFP®s), as another example, are not legally fiduciaries, but held to a fiduciary standard by the CFP Board. In all cases, fiduciaries have a relationship with their beneficiaries that requires high levels of trust and good faith, and as a result, must avoid conflicts of interest.

It’s just as important to know who isn’t a fiduciary. Insurance agents, for instance, generally are not fiduciaries. They only have to sell you a suitable product, not necessarily the one that is in your best interest. Because insurance agents work on commission, they may have a monetary motivation to sell you a product that is not the best one for you if it brings them a bigger payday.

What Is a Financial Advisor?

Financial advisors are people and services that help you create a plan for meeting your financial goals and manage it along the way. With the help of a financial advisor, you could save more, invest more wisely and reduce your debt in ways that you might not have thought possible if you did it on your own.

The term “financial advisor” describes a variety of people and services. For example, investment managers, financial consultants, financial planners and even digital investment management services called robo-advisors.

While financial advisors do generally have more knowledge than laymen about the financial services industry, they are not always legally liable for your money like you might assume. Certain relationships impose fiduciary duties, creating a legal responsibility for the beneficiary, but laws governing these duties are complex. “Financial advisor” is a job title and does not imply a fiduciary relationship.

Are All Financial Advisors Fiduciaries?

A fiduciary is someone who must act in your best interest. A financial advisor is a job title that anyone advising about your finances can use. If you’re in the market for a financial advisor, you should strongly consider a financial advisor who is a fiduciary or a fiduciary financial advisor.

In real terms, if a financial advisor does not have a fiduciary duty to you as a client, that advisor may recommend investments or products that pay them a higher commission instead of ones that would best fit your circumstances–potentially costing you more. You could pay more in up-front fees, and your investments might not be a proper fit for your financial plans. In the end, the amount that you earn and save over your lifetime could be drastically different.

How Can You Be Sure a Financial Advisor Is a Fiduciary?

Because the laws governing the financial services industry are complex and specific, there are only a few ways in which you can be sure your financial advisor is a fiduciary.

First, you could simply ask. Most advisors will respond candidly if they are fiduciaries or not.

Second, you could verify if your financial advisor is certified or registered with certain groups or governing bodies.

A registered investment advisor (RIA) is registered with the Securities and Exchange Commission or a state bureau and effectively has a fiduciary relationship with clients. All RIA conflicts of interest and outside business activities will be listed on their Form ADV.

A Certified Financial Planner™ (CFP®) is certified by the CFP Board and has completed specific training and exams. While not legally held to a fiduciary standard, the CFP Board holds CFPs to a fiduciary duty when providing financial planning services.

A Chartered Financial Analyst (CFA) is another professional who has undertaken extensive training in investment management. Charter holders are also held to an ethical code that imposes a fiduciary relationship between the CFA and investment management clients.

Lastly, a financial advisor affiliated with NAPFA, the National Association of Personal Financial Advisors, must be a fee-only, fiduciary. An advisor may often be NAPFA-affiliated and hold other credentials listed above.

How Much Does a Fiduciary Charge?

A fiduciary financial advisor has costs associated with their services that can greatly vary from one advisor to the next. The costs for you will depend on what services you need and whom you work with. The average financial advisor will charge roughly 1% of the assets under management (AUM) that you provide them to invest. That is roughly $10,000 annually for every $1 million they manage.

Some advisors charge a fixed fee for certain services or hourly fees to work with you. Those can range, as an estimate, from $7,000 to $55,000 or more on the fixed fee end and $120 to $300 per hour. You need to check with your advisor about how they plan to charge you for the services you need to be rendered. Also, make sure you understand any commissions they may earn for the sale of financial products to you before agreeing to work with them.

Not sure whether a financial advisor is worth the cost? This calculator shows how their intervention in your financial life could affect your net worth over time:

Fiduciary vs. Financial Advisor: Key Differences

While financial advisors can be fiduciaries, not all financial professionals are held to this stringent standard. Here’s a look at the key differences between these two concepts:

• Legal obligations: Fiduciaries are legally required to act in the best interest of the person, people or entity they have entered into a relationship with. Financial advisors are not automatically held to this legal and ethical standard, although many are.
• Scope: While financial advisors are solely focused on helping clients manage their money and make financial decisions, fiduciaries can include a much wider scope of professionals, including lawyers, real estate agents and trustees.
• Regulation: Fiduciaries who are financial advisors are subject to either federal or state regulation, including SEC oversight. Because the term “financial advisor” merely refers to a general profession, financial advisors aren’t automatically subject to a particular level or type of oversight, although many are.

Bottom Line

Fiduciaries are obligated to act in your best interest, whereas the title “financial advisor” implies no legal obligation. When looking for a financial advisor to help you develop your custom financial plan, you should ensure that your financial advisor is a fiduciary. You’ll likely feel a lot more confident in your overall plan and investments if you know that duty exists.

Tips for Building Wealth

• A financial advisor can help you build strategies to reach your financial goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Invest early and often to take advantage of compound interest. Use SmartAsset’s free investment calculator to get a good estimate of how to grow your nest egg over time.

Next Steps

Do you want to learn more about financial advisors? Check out these articles:

• What is a Fiduciary Financial Advisor?
• What Type of Financial Advisor Do I Need?
• Financial Advisor vs Wealth Manager
• Investment Advisor vs. Financial Planner
• Robo-Advisors vs. Financial Advisors
• Financial Planner vs. Financial Advisor

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