What is a Fiduciary Financial Advisor?

February 24, 2022|Caleb White

Bottom Line Up Front

  • A fiduciary financial advisor manages a client’s assets and provides financial advice while acting in the client’s best interest.
  • Fiduciaries are legally obligated to disregard their interests to act in their clients’ best interests, avoid any conflicts of interest, and fully disclose any that may arise.
  • There are two standards financial advisors may follow, the Fiduciary Standard and the Suitability Standard.

The word fiduciary originates from the Latin term Fiducia, which simply translates to “trust”. A fiduciary can be anyone who acts on someone else’s behalf. There are many examples of fiduciaries such as fiduciary financial advisors, bankers, business advisors, and attorneys. Understanding the difference between fiduciary and non-fiduciary financial advisors can be important to clarify your relationship’s parameters and maximize the return on your investments.

Understanding What a Fiduciary Is

When it comes to investing, not every financial professional is required to act solely to benefit their client. Luckily, some financial advisors choose to act under the fiduciary standard, a standard of practice put into place by the Investment Advisers Act of 1940. A fiduciary has a requirement to always put their client’s interests before their own. In some cases, breaking this fiduciary trust can result in large fines or even jail time.

The Three General Fiduciary Duties

While every state has its specific laws about fiduciary duties, there are three general duties that fiduciaries are required to follow (be aware that the SEC has issued new proposed rules on February 9, 2022):

  1. Duty of loyalty. The duty of loyalty simply means that the fiduciary is tasked with always making the best decision for the client, and not for their gain. An example of this could be an executive at a company using confidential information for their gain, which would violate the duty of loyalty to the company and shareholders.
  1. Duty of care. This duty dictates that fiduciaries use in-depth research and critical analysis to make informed decisions on the behalf of their beneficiaries.
  1. Duty of good faith. Just researching all of the choices on behalf of the client isn’t enough to be considered a fiduciary. After using due diligence to thoroughly examine all of the possible options, the fiduciary is then required to choose the option that best serves the interests of the client.

Types of Fiduciary Relationships

Fiduciary relationships come in a variety of forms, but here are some common ones:

Lawyer and client

Since lawyers are entrusted with clients’ personal information, the relationship between them and their clients carries a considerable amount of trust. Lawyers bear a great deal of fiduciary responsibility and can be severely punished if they breach them. 

Board and shareholders

Members of a board are responsible for deciding the direction of the company. When it comes to making decisions on behalf of the company, the board members must act in the best interests of all shareholders. This means that they are required to explore every option that’s available to them before a final decision is made. 

Trustee and beneficiary

When someone is making arrangements on behalf of their estate or a trust, they must designate someone as a trustee. After the trust or estate trustee has legal control, it is then their responsibility to make decisions concerning the assets held in the trust or estate’s name, but they must ensure such decisions are in the best interest of the beneficiaries. 

Employers and employees

In a general sense, employers don’t hold fiduciary responsibilities when it comes to their employees. However, when an employer offers a retirement plan, they become a fiduciary for that plan. Under this relationship, employers must act solely in the best interests of plan participants using the prudent-person standard.

To relieve some of those responsibilities, employers can hire someone to share some of the fiduciary responsibilities, such as a third-party retirement service provider. 

Financial advisor and client

When someone starts working with a financial advisor, they give them access to and control of their money and investments. Some financial advisors have limited control over their client’s assets, which means that they can make decisions on their behalf, sometimes without approval. 

But not every advisor follows the fiduciary standard. There are actually two different standards that advisors can operate under and sometimes it’s not always clear which standard they’re working within. 

The Two Standards of Financial Advisors 

The Fiduciary Standard

Advisors who are Registered Investment Advisors (RIAs) must provide financial advice based on the Fiduciary Standard. This means that they must act in the client’s best interest at all times, avoid any conflicts of interest, and fully disclose any that may arise.

Also among the class of fiduciary financial advisors, are CFPs or Certified Financial Planners. Because there is a rigorous accreditation process, only a small fraction of advisors are CFPs. If you’re looking for a fiduciary advisor, every CFP is legally held to the Fiduciary Standard.

The Suitability Standard

Under the Suitability Standard, financial advisors can sell investment products to clients as long as those products match the financial situation of their clients. 

What’s the difference between Fiduciary and Suitability Standards?

The main difference between the Fiduciary and Suitability Standards is that the Suitability Standard does not require your advisor to act solely in your best interest.

Does that mean that all non-fiduciaries will only suggest their most personally lucrative options? Certainly not, the key difference is that the Suitability Standard only requires advisors to consider what is most suitable which may not completely align with the client’s objectives and risk profile. Under the Fiduciary Standard, the client’s needs must be entirely prioritized over the advisors’ own interests. 


If you are looking to hire a financial advisor, you need to start by ensuring that whoever you entrust with your assets is looking out for your best interests. Advisors that follow the Fiduciary Standard are obligated to act in the most beneficial way towards their clients. By working with a fiduciary, you are guaranteeing that your needs are being prioritized.

Categories: Business, Retirement