Fiduciary vs. Financial Advisor: What You Need to Know

Whether you're searching for the best retirement plan, thinking about future education expenses, or looking at estate planning strategies, seeking out a professional is often the best way to reach your financial goals. But not all financial and investment experts are guaranteed to always put your best interests first.

Fiduciaries and financial advisors often overlap, but not all financial advisors are fiduciaries. Also, some fiduciaries aren't necessarily financial planning experts, such as how lawyers generally have a fiduciary duty to protect clients' privacy and act in their best interests, but they might not be skilled in areas like investment management.

Here's how fiduciaries differ from regular financial advisors in more detail.

What is a fiduciary?

The term fiduciary can have slightly different meanings depending on the context, but when it comes to providing financial advice or financial planning services, a fiduciary is typically someone with a legal or professional obligation to put your best interests first throughout their work with you.

Definition and legal obligation of a fiduciary

Fiduciary generally means a person or entity that holds a position of power or trust over another person or entity, and as such, they are expected to act with loyalty, care, and put the other party's best interests first. 

Certain fiduciaries need to meet certain legal requirements, such as how Registered Investment Advisors (RIA) are regulated by the Securities and Exchange Commission (SEC). Under federal law, they have to fulfill a fiduciary duty that includes acting with a duty of loyalty and care to clients.

If they violate fiduciary duties, they could face consequences like fines, losing certifications, or losing their ability to practice as an SEC-registered advisor. They might even face lawsuits for suspected breaches of fiduciary duty, and it's possible that an advisor could face criminal penalties for serious offenses.

Sometimes, however, a fiduciary is following professional requirements but not necessarily legal ones. For example, to be a certified financial planner (CFP), you have to follow the CFP Board's Code of Ethics and Standards of Conduct, which includes acting as a fiduciary. The CFP's fiduciary requirements arguably go above and beyond the SEC's, as CFPs are expected to put clients' interests above their own, not just on the same playing field.

Note: CFPs are often also RIAs, and thus they would have to follow fiduciary obligations set by both the CFP Board and the SEC.

Fiduciary duty: Acting in a client's best interest

A fiduciary duty is the set of laws, rules, or guidelines a fiduciary follows. Generally, a fiduciary has to act in a client's best interests throughout their relationship, though there's some variance in what exactly that means, such as based on the scope of the relationship and the fiduciary standard the financial professional is following.

Under SEC requirements, for instance, a key distinction between fiduciary financial advisors and non-fiduciaries is that a fiduciary can not put their own interests ahead of a client's in all aspects of their working relationship, whereas a non-fiduciary broker-dealer only has to act in a client's best interests when giving investment advice. 

In other words, a fiduciary bound by the SEC's fiduciary duty responsibilities not only acts with your best interests in mind when recommending investments but also when providing financial planning services like education planning. In theory, an advisor might lose out on some fees if you put more money into a 529 plan to pay for college, for example, rather than maintaining an investment account through the advisor. But if that's what's in your best interest, they're supposed to recommend that.

Also, some advisors follow a stricter fiduciary duty, like CFPs, which doesn't just require them to put your interests on par with their own but actually makes them put your best interests first.

Regardless of the specific fiduciary standard a financial professional follows, this standard of acting with your best interests in mind generally stems from two main requirements:

• Duty of loyalty: A duty of loyalty means fiduciaries have an obligation to act in a client's best interest such as in terms of disclosing or avoiding potential conflicts of interest
• Duty of care: A duty of care means fiduciaries have an obligation to act in a client's best interest such as in terms of monitoring a client's accounts and making prudent decisions. This duty can be somewhat vague and vary based on the scope of work, so sometimes it's more explicitly defined in a contract.

Types of fiduciary relationships

A fiduciary often applies to certain types of financial advisor relationships, but there can be many types of fiduciaries such as:

• Lawyers: They typically have a fiduciary relationship with clients, such as to act in confidence, in good faith, and avoid or disclose conflicts of interest.
• Real estate agents: While it can depend on the circumstances, sometimes real estate agents act as fiduciaries to clients, which can be important for homeowners who want assurance that their agents are making real estate recommendations that benefit them the most, rather than the agent looking out for their commission.
• Retirement plan administrators: Under the Employee Retirement Income Security Act (ERISA), there are retirement plan fiduciaries, such as individuals or organizations designated to manage the plan on behalf of participants. The fiduciary relationship helps ensure that the beneficiaries aren't using their status to curry favor, such as getting kickbacks from investment firms selected to offer funds to the plan, as well as to ensure they're acting prudently to offer a diverse range of options to participants.

What is a financial advisor?

Financial advisors are professionals who provide expert financial guidance, such as retirement planning, investment management, budgeting, estate planning, tax planning, and insurance options. The exact mix of services varies by advisor. 

Technically anyone can call themselves a financial advisor, but to actually engage in investment advice or trading for clients, they typically must obtain certain licenses, such as the Series 63 and Series 65, or Series 7 and Series 66. They also typically have to register with state or federal regulators if providing investment advice, but that does not necessarily make them fiduciaries.

A financial advisor might not be a fiduciary if they do not register as an RIA under the SEC (though technically the advisory firm typically registers, with the regulation applying to the advisors of that firm). Instead, the advisor might register as a broker under FINRA and receive commissions when implementing investment recommendations for clients. Or, a financial advisor might not provide investment advice at all — just services like budgeting support — and not be bound by any fiduciary duty. 

Moreover, financial advisors can be traditional financial advisors (such as brokers or registered investment advisors), online financial planning services, or even robo-advisors. Robo-advisors are often still fiduciaries, as they fall under the regulation of the firm providing the technology. 

The best robo-advisors are often useful for passive traders and beginners wanting to buy and sell low-cost ETFs.

Samantha Gorelick, CFP and managing financial planner at Brunch & Budget, says that robo-advisors "will invest your money automatically via algorithm once you have responded to a risk tolerance questionnaire. Many of these robo-advisors are a good, safe option, and charge relatively low fees. Some of the robos will invest in riskier products than others, so it is important to do research on different companies before choosing the one that is right for you."

Financial advisors vs. brokers

There aren't always clear delineations between financial advisors and brokers — some brokers call themselves financial advisors, for example, and are allowed to do so. In general, though, brokers typically work on commission and are licensed to trade securities, whereas a financial advisor isn't necessarily licensed to provide investment advice (they might have a different scope of financial services) and only get paid via clients directly, not via commissions.

Generally, brokers are not fiduciaries, whereas some financial advisors are fiduciaries. Brokers are regulated by FINRA rather than the SEC, and they follow Regulation Best Interest (BI), which only requires them to act in a client's best interest as it pertains to investment advice, not necessarily other areas of financial planning. However, it's possible to have dual registration as both a broker and fiduciary financial advisor, where generally they act as a non-fiduciary when providing investment advice and as a fiduciary for other financial planning services.

Still, the terminology and distinctions can be fuzzy, so it's best not to make assumptions. Ask clarifying questions if you're unsure of a financial professional's role.

Commission-based vs fee-only advisors

Typically, brokers earn commissions from financial services companies based on the products they sell. If you buy an annuity through them, for example, or if you choose certain mutual funds they recommend, they might earn a percentage of that purchase. In comparison, fee-only advisors only receive payment directly from clients, like by charging a percentage of assets under management/advisement, a flat rate, or an hourly rate. Keep in mind that there can be some crossover, such as among advisors dual-registered as a broker and RIA. Also, some brokers charge clients fees on top of what they earn on commissions.

Generally, commission-based advisors are not fiduciaries. Many fee-only advisors are fiduciaries, but this compensation model doesn't automatically mean they are, especially if they're dual-registered and only sometimes acting as a fiduciary.

Depending on the advisor, costs can vary. Sometimes commission-based advisors have lower upfront costs, as the client isn't the one directly paying for the services, but it might cost more in the long run if you're not getting optimal financial planning advice in your best interest. 

Fee-based advisors may be more inclined to recommend certain investment products, services, or strategies to earn commissions rather than solely for the benefit of the client. That doesn't necessarily mean that a non-fiduciary advisor will work against a client's best interests. But there's generally not the same level of transparency and accountability as with a fiduciary.

Fiduciary vs. financial advisor: key differences

As mentioned, the lines between a fiduciary and financial advisor are not always clear. Some financial advisors are fiduciaries, but not all. And a fiduciary isn't always a financial advisor, such as how a lawyer can be a fiduciary. 

Still, if comparing fiduciary financial advisors vs. non-fiduciary financial advisors, there are some key differences.

Standard of care

Typically, fiduciary advisors have to act with a duty of care throughout the advisory relationship, whereas non-fiduciaries face a more limited standard of care, if any. For fiduciaries, this duty of care can vary somewhat based on whether the advisor is following just the SEC's standard or additional guidelines from a certifying body like the CFP board. But generally, it means they're held to a higher standard of care in terms of advising clients and monitoring their accounts with their best interests in mind in all aspects of financial services they're providing, not just investment advice. 

Compensation models

Fiduciary advisors are usually fee-only advisors, which means that they don't earn additional commissions from certain funds or financial products. With a fee-only advisor, you may be charged a percentage of assets they're managing — often around 1% annually — or you'll pay either a flat fee or an hourly fee. 

Before consulting with a fiduciary advisor, make sure to ask how much they charge. Meeting with a fiduciary can become costly, but sometimes the upfront costs are worth it in the long run. Depending on your needs, you may only need to meet with a fiduciary once or twice. Hourly rates tend to be between $100 to $300 an hour.

But if you need to meet on a long-term, rolling basis, a fixed-fee or percentage-based plan may be more appropriate. For instance, a fixed annual fee may cost as low as around $1,000, while others might be $10,000+, depending on factors such as the scope of services and the local market. 

Remember, though, that a dual-registered advisor might act as fiduciary for non-investment advice and charge fees, while also accepting commissions when acting as a non-fiduciary broker regarding investments.

Conflict of interest rules

A key difference between fiduciary advisors and non-fiduciaries is that fiduciaries generally face stricter rules against conflicts of interest. For the most part, both RIAs and brokers have to disclose and ideally avoid conflicts of interest as it pertains to investment recommendations, but RIAs, being fiduciaries, generally have to go a step further to disclose or avoid conflicts for all other areas of the relationship. Some fiduciaries might even be required or expected to eliminate conflicts more than non-fiduciaries, but it depends on factors like the advisors' certifications and company rules.

Regulations and oversight

Typically, fiduciaries are regulated by the SEC, though some smaller advisors are regulated by state regulators. Non-fiduciaries might not be regulated at all, depending on the scope of services, such as if an advisor only provides non-investment advice. But brokers, who aren't typically fiduciaries unless dual-registered, do face oversight from FINRA. 

However, SEC rules are generally a bit stricter than FINRA, or at the very least they're perceived to be, which could result in stricter adherence. The SEC does have oversight of FINRA, but FINRA is a self-regulatory organization, meaning it's managed by members of the finance industry.

Why should you choose a fiduciary?

The choice is subjective, but many experts believe fiduciaries are generally the better option for professional financial advice and management, since a fiduciary advisor must act in your best interest throughout the advisory relationship, not just when giving investment recommendations.  

That said, some people prefer working with non-fiduciary financial advisors, whether that's because they like that particular advisor more, or perhaps the upfront costs are lower.

Pros of working with a fiduciary

The specific fiduciary financial advisor benefits can vary based on the advisor's services and experience, but some common ones include:

• More unbiased advice: It's hard to always remove bias, but generally, being held to a stricter standard around acting in your best interest helps fiduciaries make recommendations that benefit you, not them.
• Transparency: Fiduciaries generally have stricter rules around disclosing or avoiding conflicts of interest. So, even if conflicts do exist, you can be more confident knowing that they're transparent about these, helping you then make your own decisions about what to do next.
• Alignment: Fiduciaries generally work on a fee-only model, which often means their interests are aligned with yours — the better you do financially, the more they can earn from you working with them. In contrast, a non-fiduciary might be aiming to rack up commissions, even if it doesn't result in you optimizing your wealth.

Potential drawbacks to consider

While there are many advantages to working with a fiduciary, some potential drawbacks to consider include:

• Higher upfront costs: Some brokers don't charge clients fees directly, whereas a fiduciary advisor does. So, you might pay more upfront, and even if you get better financial advice that helps in the long run, you have to navigate higher upfront costs.
• Higher regulatory burden: The flip side of being held to a higher regulatory or at least professional standard is that a fiduciary might not have as much flexibility as a non-fiduciary. So, it might take more time for certain decisions to get approved by their compliance team, for example.
• Limited investment capabilities: While not universally true, some fiduciaries have limited investment capabilities. They might focus on other areas of financial planning and outsource investment management to another firm, for instance. In contrast, a broker generally has licenses that more directly deal with trading and are often part of companies that have more direct market access or at least better trading technology.

How to find a fiduciary advisor

You can find the best financial advisors by searching advisor databases, including ones that specifically list fiduciary, fee-only advisors, such as:

• Garrett Planning Network
• XY Planning Network
• The National Association of Personal Financial Advisors (NAPFA)
• Alliance of Comprehensive Planners (ACP)
• CFP Board

You can also talk with friends or family who have worked with a fiduciary financial advisor in the past, or you can do an online search for a fiduciary near you. 

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