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What Is A Fiduciary?

A fiduciary is a person or institution that is required to act in the best interest of another person when managing their financial life. Here’s why that can be important.

Articles by Corbin Blackwell, CFP®
By Corbin Blackwell, CFP® Financial Planner, Betterment Published Dec. 16, 2019
Published Dec. 16, 2019
4 min read
  • Not all financial advisors are required to do what is in their clients’ best interests.

  • The suitability standard does not require a financial advisor to eliminate conflicts of interest.

  • A fiduciary is legally required to put client interests ahead of their own.

When searching for a trusted professional to manage your investments, you likely researched the advisor’s education, experience, and investment strategy. While all of those things may be important, some advisors are not obligated to do what is in your best interest. Only a fiduciary is required by law to put your interests first.

In this article, I’ll explain what a fiduciary is, who is a fiduciary, and when you should seek a fiduciary to manage your investments.

What is a fiduciary?

A fiduciary is someone who is responsible for acting on behalf of another party, and is legally required to do what is in the best interest of the other party.

A fiduciary puts their clients’ best interest ahead of their own. While you may assume that all financial advisors do this, the truth is that many advisors are not held to the fiduciary standard.

What is the fiduciary rule?

The Investment Advisors Act of 1940. established a fiduciary obligation of Registered  Investment Advisors (RIAs) to their clients almost 80 years ago. In the decades since, the Department of Labor (DOL), the Securities and Exchange Commission (SEC), and several politicians have debated and proposed changes to the scope and application of the fiduciary standard in the financial services industry.

Most recently, the much discussed DOL fiduciary rule, which attempted to require all financial advisors to act as fiduciaries when managing retirement accounts, was voted out. While the fiduciary rule was not implemented, the press coverage and industry pushback surrounding the rule shed new light on the fact that many advisors are not required to put clients’ best interests ahead of their own.

What is the fiduciary duty?

A fiduciary is obligated to follow both a duty of care, and a duty of loyalty to their clients.

The duty of care requires a fiduciary to place their clients’ best interest ahead of their own. Under the duty of loyalty, the fiduciary must also attempt to eliminate all potential conflicts of interests, and when that isn’t possible, they must fully disclose conflicts of interest to their clients.

While it’s common to find financial advisors that provide similar types of advice, not all advisors are held to the same standards when providing advice. It is important to know who is required to act as a fiduciary so that you can choose the right advisor for your investments and financial situation.

Are all advisors “fiduciary” financial advisors?

Financial advisors not acting as fiduciaries may operate under a less stringent standard called the suitability standard. Registered Investment Advisors (RIAs), and Certified Financial Planner (CFP) professionals are held to the higher fiduciary standard, while Registered Representatives, and brokers are held to the less stringent suitability standard.

Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but do not have to put the clients’ best interests first.

For example, under the suitability standard, purchasing a low risk mutual fund for a conservative investor is perfectly acceptable even if that particular fund is very expensive and ultimately gives the advisor the biggest commission.

Even though there may be more cost effective alternatives out there, the advisor operating under a suitability standard does not have to present a better alternative to the client, since the higher fee option is suitable for the client based on their risk tolerance.

The client may be better off with a lower cost alternative, but a non-fiduciary advisor can recommend the fund that will provide them with the greatest payout.

Below is a straight forward breakdown between the suitability standard and fiduciary standard:

Fiduciary Standard Suitability Standard
  • Investment recommendations must be in the clients’ best interest.
  • The clients’ best interest must come ahead of the advisor’s interest.
  • Advisor must attempt to eliminate all conflicts of interest. If it is not possible, then they must fully disclose all conflicts of interest.
  • Advisor has a duty of care and loyalty to the client.
  • Investment recommendations must be appropriate based on the client’s circumstances.
  • Advisors must attempt to gather relevant information to help determine if an investment recommendation or series of recommendations are suitable.
  • The advisor’s loyalty is to the broker-dealer, not the client.

The Importance Of Working With A Fiduciary

If you are seeking an advisor who can trade on your behalf and make investment decisions for you, contemplate choosing a fiduciary advisor. This should ensure that you only receive suitable recommendations, but that you are also benefiting from recommendations that are in your best interest.

If you want to entrust an advisor with your financials and give them discretion, you may want to make sure they are legally required to put your interests ahead of their own.

If you are simply seeking help trading securities in your portfolio, or do not want to give an advisor discretion over your accounts, you likely do not need a fiduciary advisor.

Choosing Your Fiduciary Relationship

Hiring a fiduciary advisor to manage your portfolio is one of the best ways to ensure you are receiving unbiased advice. When shopping around for a financial advisor, remember to ask whether or not they are a fiduciary, and how they are compensated.

This will help you better understand whether or not they are able to give you the caliber of unconflicted advice that you may be seeking. While not everyone feels inclined to work with a fiduciary advisor, asking questions and understanding that not all advisors are held to the same standard of financial advice is key to making the best choice for who you trust with your hard earned money.

Why Betterment Is A Fiduciary

A common point of confusion is whether or not “robo advisors” can be fiduciaries. Let’s clear up any ambiguities: they certainly can be.

Betterment is an RIA and is held to the fiduciary standard as required under the Investment Advisors Act.

We act as a fiduciary because we are committed to helping you build a better life, where you can save more for the future and can make the most of your money through our cash management products and through our investing and retirement products.

And, our dedicated team of human advisors are CFP™ professionals, and as such, are held to the fiduciary standard as well.

This way, customers may be sure that most financial advice they receive from Betterment, whether online or from our team of human advisors, is in their best interest.

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