What Is a Fiduciary Advisor?
A fiduciary advisor is someone who manages another person’s (or entity’s) assets on their behalf. The relationship between a fiduciary and a client is one of trust. The advisor must abide by fiduciary duty and is legally required to act in their client’s best interest while providing financial advice or managing investments.
A person who is trusted with property or power, to benefit someone else
- Relating to the relationship between the fiduciary and their client
- Based on confidence and trust
- Dependent on public confidence in something
Fiduciary Outside of Finance
Outside of the realm of finance, a fiduciary can be anyone who is entrusted with someone else’s property or power over something on behalf of that person. They must act in the best interests of that person while performing duties. The fiduciary is chosen for the job because they are more knowledgeable about that property or management tasks. As a result, the fiduciary can do more on the owner’s behalf than the owner can do for themselves.
Fiduciary in Finance
Most often, if you hear the term “fiduciary,” it is referring to a financial fiduciary.
Fiduciary advisors in finance are bound by laws and regulations to provide financial advice to their clients that is best for the client instead, instead of simply meeting a suitability standard. The suitability standards that non-fiduciary advisors must meet leave a lot of wiggle room for pushing their company’s agenda – in short, selling products.
Most fiduciary financial advisors are independent, but there are fiduciary advisors who work for companies that voluntarily abide by fiduciary rules.
What Is Fiduciary Duty?
Fiduciary duty is the responsibility required by law for a fiduciary to act in the best interests of their client. Fiduciary duty is what prevents fiduciaries from recommending an investment or course of action that benefits themselves over their clients.
Fiduciaries are legally required to:
- Act in their clients’ best interests.
- Find the best possible terms and prices for their clients.
- Do their best to ensure thorough and accurate advice.
- Avoid possible conflicts of interest.
- Inform their clients of any conflicts of interest.
- Act in good faith at all times.
- Provide their clients with all relevant facts.
- Not use their clients’ assets for their own benefit.
What Is the Suitability Standard?
The suitability standard requires that a financial advisor provide advice and make recommendations that are suitable for their client’s situation. These recommendations don’t need to be in the best interests of the client; however, non-fiduciary advisors and broker-dealers can recommend something that is suitable for their clients but that isn’t necessarily the best possible option for the client.
If a recommendation is made that is suitable but not in the client’s best interest, it’s usually because the broker can make more money on the recommended option instead of the one that is actually best. The fiduciary standard, in contrast, requires the financial advisor to recommend the best course of action for their clients – not just one that is suitable.
Types of Fiduciaries
There are four different types of fiduciary financial advisors. Each type has different responsibilities and answers to different organizations. To decide which type of fiduciary advisor you need, you must first assess your financial goals and personal needs or preferences.
Registered Investment Advisor (RIA)
A registered investment advisor, or RIA, is a type of fiduciary that provides investment advice to clients with a high net worth and helps manage their portfolios. RIAs usually earn money by charging a management fee.
This fee-based structure benefits both client and advisor, since the advisor’s income is directly influenced by how well their client’s investments are performing.
Fiduciary duty for RIAs comes from the Advisers Act (the Investment Advisers Act of 1940), which bans them from participating in any behavior that could be construed as deceptive, fraudulent, or manipulative in their relationships with their clients. They’re also required to inform clients of any potential conflicts of interest. As the word ‘registered’ in the name implies, an RIA is required to register with either a state security administrator or with the SEC.
AllGen is registered investment advisor (RIA).
DOL Fiduciary for Retirement Investors
Retirement investors can be anyone from a 401(k) plan administrators to IRA account holders. For retirement investment advice, some advisors are also RIAs, but many are not and they are bound by the DOL’s responsibility rules instead.
The advice bound by DOL responsibility is only applicable to the retirement account. If that same retirement investor gets advice from this type of fiduciary for a different type of account, that advisor isn’t bound by the fiduciary duty outlined by the DOL.
Certified Financial Planner™
A CFP®, or certified financial planner™, as a financial advisor who has met the CFP® Board’s requirements, which are based on the advisor’s education, the CFP® exam, professional ethics, and work experience. The CFP® Board performs a background check on every candidate before granting its certification and holds all CFP® advisors to strict standards. They must provide the CFP® Board with information about customer complaints, employment terminations, bankruptcies, and more if requested.
A CFP® has the broadest fiduciary duty of the four types of fiduciary advisors. This means that they hold a fiduciary responsibility to provide the best possible advice to their clients for a wide range of financial activity, from taxes and insurance advice to investments and retirement planning. However, because the CFP® Board is not a regulatory body, the only punishment it can inflict for CFPs® who fail to uphold their fiduciary responsibility is to strip them of their CFP® certification.
The AllGen Team includes a growing list of Certified Financial Planners™ (CFPs®). Meet Paul, Jason, Ana, and Kathryn.
What Is a Non-Fiduciary Advisor?
A non-fiduciary advisor isn’t legally bound by fiduciary duty, so they can recommend investments and courses of action that happen to benefit the advisor more than the client. This doesn’t guarantee that a non-fiduciary advisor won’t act in the best interests of their clients, but there is no legal requirement to do so.
What Is the Difference Between a Fiduciary and a Non-Fiduciary Financial Advisor?
The difference between a fiduciary and a non-fiduciary advisor is whether or not the financial advisor is legally required to uphold fiduciary responsibility (by acting in their clients’ best interest). A non-fiduciary advisor could still uphold fiduciary duty to their clients, but would not be required to and could always behave differently.
A non-fiduciary advisor is still required to act in an ethical manner, but follows a different set of standards than fiduciary duty. These standards are called the suitability standard.
Things get confusing when some advisors are required by organizations other than the SEC to voluntarily meet standards that are more like fiduciary duty. These standards are typically defined and enforced by the financial firm the advisor is affiliated with, so it is an internal business decision as to whether or not an advisor is ever in breach of those policies.
The SEC holds these voluntary fiduciaries to the suitability standard instead.
Fiduciary Advisor Requirements
Technically, any financial advisor can uphold a fiduciary duty to their clients without being a certified or registered fiduciary. However, to become an official fiduciary, an advisor must meet the qualifications of the appropriate regulatory body for their type of fiduciary. The requirements differ depending on the type of fiduciary and which regulatory body they belong to.
Why Do These Requirements Matter?
These requirements matter because they ensure that only those financial advisors that are qualified to call themselves fiduciaries can do so. They hold fiduciaries to a high standard of customer service and care under the laws and regulations for fiduciaries. Without these requirements, advisors who were not qualified to refer to themselves as fiduciaries could do so, which would mislead their clients.
What Are the Requirements for an RIA?
To become an RIA, a financial advisor is required to take and pass the Series 65 Uniform Investment Advisor Law exam, which is administered by FINRA. While there are technically no other requirements in order to become an RIA, many will find that bringing in clients can be difficult without also having other certifications, such as the CFP® certification. Once an RIA has passed the Series 65 exam, they must register with the SEC or with the state in which they intend to practice.
What Are the Requirements for a CFP®?
In order for a financial advisor to become a CFP®, or a Certified Financial Planner™, they must first meet the CFP® Board’s educational requirements, which is at least a Bachelor’s degree or higher in a relevant field. Then they have to pass the CFP® exam. In order to practice on their own, CFPs® must demonstrate to the CFP® Board that they have sufficient work experience in financial planning, usually three years of full-time work in the field or two years in an Apprenticeship. Then, they have to pass a background check in order to meet the Board’s ethical requirements. Only after an advisor has met all of the above requirements can they apply for the CFP® mark.
Who Regulates Fiduciaries? SEC, FINRA, DOL, CFP®
Fiduciaries can be held to such high standards of customer service because they are regulated. The regulatory body and rules vary for each type of fiduciary, as do the powers the regulatory body has over its registered or certified fiduciary advisors.
Who Is the SEC?
The SEC is the Securities and Exchange Commission. Its mission is to protect investors, to keep markets fair, orderly, and efficient, and capital facilitation. It’s the organization that RIAs register with in order to be considered fiduciaries. The SEC has the power to enforce the laws and regulations that pertain to securities and each year brings civil enforcement actions against anyone, companies and individuals alike, who have violated any securities law.
FINRA is the Financial Industry Regulatory Authority, a non-profit government-authorized organization that oversees broker-dealers. It’s also the organization that issues the Series 65 exam that is required to become an RIA. FINRA protects investors by ensuring that broker-dealers operate honestly and fairly.
There’s Also the DOL…
The DOL is the United States Department of Labor. While its primary purpose is to protect job seekers, wage earners, and retirees, and to promote good working conditions, it’s the government department that has developed the fiduciary rules that fiduciary advisors must follow.
And the CFP® Board.
The CFP® (Certified Financial Planner™) Board regulates CFPs®. It administers exams that Certified Financial Planners™ must pass and issues guidelines that they must follow in order to remain CFPs®. The CFP® Board is not a regulatory body, so it cannot enforce fiduciary rules with enforcement actions like the SEC can, but it can remove the CFP® mark from anyone who fails to meet their code of ethics or standards of conduct.
What Laws and Regulations Guide Fiduciaries?
There are a variety of regulations affecting fiduciaries and how they are allowed to conduct business. Some of these are national laws that affect all types of fiduciary equally, while others are regulations that apply only to members of a specific organization.
Independent Advisers Act of 1940
The Independent Advisers Act of 1940, also known as the Advisers Act, doesn’t technically require an RIA to be a fiduciary, but it does prohibit RIAs from engaging in any fraudulent, manipulative, or deceptive behavior in their relationship with their clients. Even though the wording of the act doesn’t specify that an RIA must be a fiduciary, the Supreme Court held in SEC v. Capital Gaines Research Bureau in 1963 that this meant that all RIAs had a fiduciary responsibility and duty to their clients.
DOL Fiduciary Rule
According to the DOL’s definition of fiduciary, any financial advisor who advises on retirement planning or investments must act in the best interests of their clients. Advisors cannot conceal any conflicts of interest that arise and must inform their clients about them. The DOL Fiduciary Rule, which was proposed in 2017 and vacated in 2018, but has been resurrected by the DOL and SEC working together, expands this definition to include any advisor who provided retirement planning advice instead of only those who charged a fee.
Regulation Best Interest (BI)
The 2019 Regulation Best Interest (BI) is an SEC rule that requires any broker-dealers to act in the client’s best interest and to fully disclose any conflicts of interest or incentives that the broker-dealer could receive whenever recommending a financial product. It’s very similar to the DOL’s Fiduciary Rule and falls under the heading of the Securities and Exchange Act of 1934. Regulation BI will hold broker-dealers to a fiduciary standard and not just the suitability standard.
The Doctrine of Utmost Good Faith
The Doctrine of Utmost Good Faith is a principle of behavior under which all parties involved in a transaction must disclose all information that could influence the decision to enter into a contract. It legally requires all parties involved in a contract to be honest and to not mislead another party.
Fiduciary Duty in History
Concepts of fiduciary duty go as far back as 3,000 years ago. The way fiduciary responsibility is defined hasn’t changed much over the years; however, the legal requirements have evolved immensely to protect modern consumers.
Do I Need a Fiduciary?
Anyone who’s interested in investing, saving for retirement or financial planning could benefit from the advice of a fiduciary financial advisor. A fiduciary can help anyone make the best choices for achieving their financial goals. While any fiduciary will advise what is best for their clients, it’s important to choose the right kind of fiduciary for your financial goals.
Anyone with investments needs an RIA while those planning for retirement need a DOL fiduciary for retirement. A certified financial planner can help with financial planning goals.
Why Do I Need a Fiduciary?
A fiduciary advisor is required to provide only the advice that will be best for their clients. Because they’re beholden only to the law and not to a company agenda, a fiduciary can provide better advice and customer service. Fiduciaries are required to put their clients’ interests before their own.
Where a regular financial advisor could recommend a course of action that was good for a client but better for the advisor’s commission, a fiduciary advisor is bound to only advise what is best for the client. With a fiduciary, clients can trust that they are receiving the advice that will be of the greatest benefit to them and that they won’t be missing out on a better opportunity because of an advisor’s ulterior agenda.