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 the 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 advisors in finance are bound by laws and regulations to provide financial advice to their clients that is best for the client 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 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 the client’s 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.
AllGen is a legally-bound fiduciary and RIA firm.
AllGen is bound by fiduciary responsibility and regulations set for fiduciary advisors by the SEC. To learn more about our personal story and worldview, click here.
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 difference between the suitability standard and the fiduciary standard?
The suitability standard is a lower legal standard requiring that a financial advisor provide advice and make recommendations that are suitable for the client’s situation but don’t necessarily have to be the best option.
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 or they work for an institution that is limited in its offerings. This may not always be what is actually best for a client. The fiduciary standard, by contrast, requires the financial advisor to recommend the best course of action for their clients based on their whole financial picture and due diligence – not just one that is suitable.
How is a fiduciary advisor different from a broker?
A fiduciary advisor is required to act in the best interests of their clients and consider the client’s whole financial picture before making a recommendation. A stockbroker, often employed by a large broker–dealer, is not legally required to adhere to any fiduciary duty – they must only adhere to the suitability standard and are more transactional.
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) with the SEC.
Certified Financial Planner™
A CFP®, or certified financial planner™, is 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 three 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 on CFPs® who fail to uphold their fiduciary responsibility is to strip them of their CFP® certification.
The Department of Labor’s Fiduciary Requirement for Retirement Investors
Retirement investors can be anyone from 401(k) plan administrators to IRA account holders. For retirement investment advice, some advisors may be RIAs, but many are not and are then bound by the Department of Labor’s (DOL’s) fiduciary requirement instead. The DOL rule came into effect in 2022 and is the result of so many advisors advising retirement investors to invest or take actions that weren’t in their absolute best interest.
The advice bound by the DOL’s new fiduciary requirement is only applicable to retirement accounts. If that same retirement investor gets advice from an advisor that is not an RIA for a different type of account (such as a taxable brokerage account), that advisor isn’t bound by the fiduciary duty outlined by the DOL.
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.
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.
What Are the Requirements for a Registered Investment Advisor?
To become a Registered Investment Advisor (RIA), an organization must register with either the state of domicile or with the SEC, depending on how many assets they manage. Once the entity is registered, an individual who will act as the investment advisor representative (IAR) is required to take and pass the Series 65 Uniform Investment Advisor Law exam, which is administered by FINRA. Only then can the individual working for the RIA give financial advice. While there are technically no other requirements in order to become an IAR, many will find that bringing in clients can be difficult without also having other certifications, such as the Certified Financial Planner™ (CFP®) certification.
What Are the Requirements for a Certified Financial Planner™?
In order for a financial advisor to become a Certified Financial Planner™ (CFP®), 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 must pass the CFP® exam. In order to practice on their own and use the designation, 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, a background check is completed in order to meet the Board’s ethical requirements. Only after an advisor has met all the above requirements can they apply for and use (if granted) 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 to facilitate capital. It’s the organization that Registered Investments Advisors (RIAs) register with once the entity has reached over $100 million in assets under management 9aum). 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 violated any securities law.
FINRA is the Financial Industry Regulatory Authority, a non-profit government-authorized organization that oversees broker-dealers and RIAS that manage under $100 million. It’s also the organization that issues the Series 65 exam that is required to become an IAR of 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, as well as to promote good working conditions, it’s the government department that has developed the fiduciary rules that fiduciary advisors must follow when advising on retirement accounts.
And the CFP® Board.
The CFP® (Certified Financial Planner™) Board regulates CFPs®. 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 fiduciaries 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.
Department of Labor Fiduciary Rule
According to the Department of Labor’s (DOL’s) definition of fiduciary, any retirement advisor 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.
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 a contract. It legally requires all parties involved in a contract to be honest and not mislead another party.
Do I need a fiduciary?
Anyone who’s interested in investing, saving for retirement, and/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.
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, fiduciaries can provide better advice and customer service. Fiduciaries are required to put their client’s interests before their own.
Where a non-fiduciary financial advisor could recommend a course of action that was good for a client but better for the advisor’s commission, a fiduciary financial advisor is bound to only advise what is best for the client. With a fiduciary, clients can trust that they are receiving advice that will be of the greatest benefit to them and won’t miss out on a better opportunity because of an advisor’s ulterior motives.