What is a Fiduciary Financial Advisor?

Did you know the word fiduciary comes from the Latin words fidere, which means to trust, fiducia, which means trust, and fiduciarius, which refers to holding something in trust. Sometime in the 17th century, the word made its way into English and was used to describe something that inspires trust. Over the years, it has become a widely used term in the financial advisory industry. 

Today, the term fiduciary is commonly associated with financial advisors and asset managers, but it goes beyond finance. Lawyers, trustees, and even talent agents can be fiduciaries.

Coming back to fiduciary financial advisors, let’s understand more about them and why it matters if your financial advisor is one. 

What is a fiduciary financial advisor?  

A fiduciary financial advisor is a type of advisor who manages your money just like any other financial professional. They can help you invest, budget, plan for retirement, keep your estate in order, and more. The key difference is the standard they are held to.

A fiduciary is legally required to put your interests ahead of their own at all times. Their financial advice was always kept in mind, with the client’s needs. You can expect unbiased advice, free from any conflict, curated purely to benefit you. This obligation ensures that your financial well-being is always prioritized. 

A fiduciary advisor offers transparency. They are required to avoid conflicts of interest, and if any do arise, they must clearly disclose them. They are also transparent about every dollar you pay. This includes how much they charge for their services and what exactly you are getting in return. Fiduciaries typically operate under a fee-only or fee-based structure. They do not sell products just to earn a commission. This automatically reduces the likelihood that a financial advisor will recommend investments that benefit them more than they benefit you.

A fiduciary advisor is also expected to provide advice that is tailored to your financial goals. Customization is key for fiduciaries. Their entire role revolves around acting in your best interest and helping you make decisions that align with your long-term financial needs.  

The financial advisor’s fiduciary duty is regulated by bodies such as the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Certified Financial Planner (CFP) Board.

How to hire a fiduciary financial advisor?

If you are looking for an advisor with fiduciary responsibility, you must look out for certain professional designations. These include the following:

• Certified Financial Planner (CFP) 
• Accredited Investment Fiduciary (AIF)
• Registered Investment Advisor (RIA)
• Certified Public Accountant/Personal Financial Specialist (CPA/PFS)
• Chartered Financial Analyst (CFA) 
• Certified Financial Fiduciary (CFF)
• Affiliation with the National Association of Personal Financial Advisors (NAPFA)

While not every individual with these credentials is automatically a fiduciary advisor in every engagement, these designations generally suggest better ethical working arrangements.

What are the costs associated with hiring a fiduciary financial advisor?

The cost of hiring a fiduciary financial advisor depends on the services you need and the fee model the advisor uses. Most fiduciaries do not follow a commission-based model. They get paid directly by the client for the services they provide. 

Fiduciary financial advisors usually follow one of three fee models:

• The most common is the Assets Under Management (AUM) model, where the advisor charges a percentage of the money they manage for you. This is typically around 1% per year, though it can vary depending on the size of your portfolio.
• Some fiduciary advisors may charge a flat annual or monthly fee for ongoing support.
• Some advisors may also charge by the hour. These work with the client on short-term arrangements and provide occasional guidance, billed by the hour. 

What are the benefits of working with a fiduciary financial advisor?

1. Security first  

A survey found that broken trust is the number one reason investors start looking for a new advisor. In fact, lack of trust was ranked even above poor investment performance. 61% of respondents said the main reason they would leave their advisor is simply that they no longer trust the professional. And when choosing a new financial advisor, trust becomes the top priority. About 72% of investors said they would hire someone they genuinely feel they can trust. 

Working with a fiduciary advisor instills trust and ensures your interests are prioritized. A fiduciary is legally obligated to put your interests ahead of their own, so you do not have to worry about anything. They do not push products, nor do they have any hidden agendas. This reassurance frees you from constantly worrying about whether you are making the right decisions or whether someone is taking advantage of your trust. You can focus on your work, your family, and the rest of your life, knowing your financial future is being handled responsibly. 

2. Transparency

Transparency is another significant advantage of working with a fiduciary investment advisor. This comes in handy, especially when you are making tough financial decisions. Let’s consider an example. For instance, you are thinking about rolling over a retirement plan. In this case, you need someone who will walk you through every detail of the conversion without hiding anything. You would want to know several things about the rollover, such as: 

• Does the new plan actually make sense for you? 
• What are the tax implications? 
• How does it fit with your present needs and your future goals? 

A fiduciary advisor can help you look at these questions objectively, to ensure you do not end up making decisions in the dark. 

This transparency also extends to how they get paid. Many fiduciary advisors work on a fee-only or AUM-based model. They do not earn commissions from recommending specific financial products. That removes a significant source of potential conflict. Instead of wondering whether a suggestion is truly right for you, you can see clearly what you are paying for and why. 

3. Comprehensive and personalized financial planning

Fiduciary financial advisors consider everything together when they work for you. This may include your retirement plans, estate planning needs, tax strategies, investment management, and insurance coverage to build a plan that caters to your exact needs.

Fiduciaries focus on customization. Since every investor’s circumstances are different, fiduciary advisors craft strategies based on your priorities, concerns, and what you want your future to look like. Once they understand your risk tolerance, time horizon, and goals, they design a customized investment strategy that aligns with your specific needs. 

This personalized approach is a significant benefit of working with a fiduciary. You never feel like you are being pushed into a tried-and-tested formula. Instead, you have a plan that is designed specifically for you. 

Some considerations when working with a fiduciary financial advisor

One of the first things you will notice when you decide to work with a fiduciary financial advisor is the cost. Fiduciary advisors usually charge asset-based fees. This results in you paying a percentage of your portfolio every year. And you may have to pay this fee even if the advisor has made no active changes to your portfolio in that year. This can feel expensive compared to a non-fiduciary professional who may earn a commission only when transactions occur. For certain situations or smaller portfolios, paying a higher ongoing fee may not make sense. In those cases, choosing a commission-based financial advisor or hiring someone for a one-time consultation may be the better call.  

Another thing you need to know is that being a fiduciary does not completely eliminate all risks. While fiduciary duty imposes a higher standard of care and caution, people do not always meet those standards. There have been instances where fiduciaries have fallen short. Some fail to perform due diligence before recommending products. Others make changes to investment allocations without getting your permission. A common issue is when financial advisors place client money in funds that charge unnecessary fees, even though similar lower-cost options are available. And sometimes, financial advisors may conveniently leave out the risks associated with certain investments. 

If you ever notice such an action or anything else that seems off, and you feel that your advisor is putting their own benefit ahead of yours, you have every right to question it. In fact, you should. Since fiduciary advisors operate under some governing bodies, like FINRA, the SEC, and the CFP Board, you can report to these organizations in case of any breaches. These organizations can step in and impose disciplinary actions, such as the temporary suspension of their license. In extreme cases, they may also permanently revoke their right to practice. You can also take legal measures against fiduciaries if you think they are not following the established standards while managing your money. 

When is the right time for you to bring a fiduciary financial advisor on board?

Hiring a fiduciary advisor can be suitable at different points in your financial life. For instance, if you are a new investor, a fiduciary can be incredibly helpful. When you are starting, you may not have the experience to judge whether an investment recommendation is right for you. New investors are also more vulnerable to scams and may receive advice that is more of a sales pitch than customized guidance. Hiring a fiduciary can protect you from these risks because they are required to act only in your best interest. This can give you the peace of mind you need when you are new and learning how everything works.

Hiring a fiduciary can also be helpful when you are dealing with estate planning. This is one of the more sensitive areas of financial planning. Your estate involves your legacy and your family’s future. Hence, working with someone who offers transparency and honesty can be a boon.

Retirement is another stage where hiring a fiduciary makes sense. If you are looking ahead to your future and want someone who can walk you through long-term investment strategies and tax planning with zero bias, a fiduciary can be a suitable option. 

Fiduciary advisors can also be suitable for people with more complex financial lives. If you are a high-net-worth individual or if you have multiple assets, a business, or a large estate, hiring a fiduciary can help you keep things under control. Fiduciaries look at everything together and can spin a comprehensive plan that takes care of your entire estate.

Having said that, you do not need to be wealthy to hire a fiduciary financial advisor. Sometimes you simply want an advisor who is transparent and honest, someone who is not trying to sell you products you do not need. If you value trust and want a long-term partner, a fiduciary is a good fit. 

Moving forward with a fiduciary advisor  

Hiring a fiduciary financial advisor can be a good choice when you want someone who truly listens to you and puts your needs first. These advisors are legally required to act in your best interest, and that alone can make your financial journey feel a lot less stressful. If you are thinking about working with a fiduciary and want to find someone who genuinely fits your style, you can try using our financial advisor directory to get started.  

Frequently Asked Questions (FAQs) about fiduciary investment advisors

1. Is my financial advisor a fiduciary?

Your financial advisor may or may not be a fiduciary. The easiest way to check is to look at their certifications. Designations such as Certified Financial Planner (CFP), Accredited Investment Fiduciary (AIF), Registered Investment Advisor (RIA), Certified Public Accountant/Personal Financial Specialist (CPA/PFS), Chartered Financial Analyst (CFA), or Certified Financial Fiduciary (CFF) often indicate adherence to fiduciary standards. You can also keep it simple and ask them directly. 

2. Do fiduciaries charge more?

They can charge more than commission-based advisors, but that is not always the case. Fiduciary financial advisors follow a fee-only or fee-based model, and the cost depends on what services you need. Sometimes you may end up paying more, and sometimes you won’t. It really varies. 

3. When should you hire a fiduciary?  

You can hire a fiduciary when you are just starting your investment journey. They are also an excellent fit for retirement planning, estate planning, or situations where you value transparency above everything else.

4. What can you do if your fiduciary does not act in your best interest?

If you ever feel your fiduciary is not acting in line with their obligations, you can report them to regulatory bodies such as FINRA, the SEC, or the CFP Board. You also have the option to take legal action.