Sedona Arizona

Is your financial advisor a fiduciary?

The fiduciary standard is one of the more misunderstood and misquoted obligations in financial services. Many financial advisors would say they take on a fiduciary duty. At the same time, many advisors are not truly bound by the standard.

The word fiduciary sounds reassuring to the potential client. It seems like anyone who takes on the licensing and title of financial advisor or financial planner would naturally be a fiduciary.

However, there are two standards under which advisors can act: the fiduciary standard or the suitability standard.

How to know if your financial advisor is a fiduciary

Here’s a few ways the term fiduciary has been defined:

Investopedia says: A fiduciary, in any context, is a person who is ethically or legally obliged to act in the best interests of another party.

Wikipedia says: A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons).

Nerd Wallet says: A fiduciary is an individual or organization who has a legal duty to act in the best interest of someone else. Fiduciaries have a bond of trust with clients and must avoid conflicts of interest. In finance, fiduciary financial advisors must only recommend investments and other financial planning products that are the best fit for their clients.

The CFP® Board has set the standard, literally, that requires “at all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client.” Then, they go on to list the duties owed to clients by the CFP® professional; click here to see more.

Can your advisor choose to act as a fiduciary?

Because there are two standards, a non-CFP® professional can choose to act under the suitability standard when providing advice. As stated above, CFP® professionals must act under the fiduciary standard at all times when providing financial advice.

Here’s a few ways the suitability standard has been defined:

Seeking Alpha says: The suitability standard requires brokers and investment advisors to recommend investments that are suitable for the client. However, they are not required to act in the best interests of the client; whereas a fiduciary is required to place their clients’ best interests ahead of their own.

Investopedia says: Broker-dealers have to fulfill what is called a “suitability obligation,” which is loosely defined as making recommendations that suit the best interests of their client. Some broker-dealers feel this is unfair as it may affect their ability to sell investment vehicles that benefit their bottom line, but all a suitability obligation means is that the broker-dealer needs to believe that the decisions they make truly benefit their client.

FINRA says: a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.

Smart Asset says: Those who conform to the suitability standard just have to make sure their recommendations are suitable, given the client’s age, goals, resources and other factors.

Importance of working with a fiduciary

Can you spot the glaring differences between the fiduciary and suitability standards?!

Simply stated: it’s important to work with a fiduciary advisor because you don’t know what you don’t know.

Under the fiduciary standard, the requirement for recommendations and disclosure is significantly higher than under the suitability standard. This is not to say that advisors acting under the suitability standard are not also acting in the client’s best interest.

Hear more on this topic

Listen to the full Financial Purpose podcast episode here: Episode 15 – Is your advisor a fiduciary?

Watch the video version of this episode:


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Author: Dale Shafer II, CFP®, APMA®, CDFA®

The National Association of Personal Financial Advisors
The Society of Advice

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