Advisors
Fiduciary vs. financial advisor: What’s the difference?
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Published 1:30 p.m. UTC June 18, 2024
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Key points
- A fiduciary has a legal and ethical duty to act in another person’s best interest.
- Financial advisors help clients manage various aspects of their financial lives.
- Not all advisors are fiduciaries, and those who aren’t are held to lower standards of care.
You might turn to a financial advisor for help managing your money. But while financial advisors can help with various financial services, they aren’t all created equal.
Not all financial advisors are legally or ethically required to act in your best interests. Some of them can recommend financial products based on the commissions they earn. They can do so even if it means you’ll pay a higher price.
The good news is fiduciary financial advisors must provide a higher standard of care.
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What is a fiduciary?
A fiduciary is bound by law and ethics to act in someone else’s best interests. They owe a certain level of care to another party, known as a principal or beneficiary. That level of care reflects a special trust and confidence one party places in another.
Situations where someone could have a fiduciary duty include:
- Financial advisors to clients.
- Corporate directors to shareholders.
- Lawyers to clients.
- Trustees to beneficiaries.
- Guardians to wards.
- Doctors to patients.
- Charity officers for charities.
The fiduciary relationship is taken very seriously. Someone who breaches their fiduciary duty could face a lawsuit and be required to pay damages. They could also face professional consequences, such as license loss, accreditation loss or disbarment.
What is a financial advisor?
In simple terms, financial advisors advise clients on their finances. This broad designation can include the following professionals:
- Investment advisors.
- Brokers.
- Insurance agents.
- Financial planners.
Many financial advisors recommend financial products and manage clients’ portfolios. Others offer a wider variety of services, such as comprehensive financial planning. A financial advisor may:
- Analyze your financial situation.
- Learn about your risk tolerance and capacity.
- Research and recommend financial products.
- Manage your investment portfolio.
- Help you set financial goals and create plans to meet them.
It’s important to know that anyone can call themselves a financial advisor. They aren’t required to have a specific education or certification. So finding a reputable professional with the qualifications and services you need is critical.
One common professional credential among financial advisors is a certified financial planner. A CFP meets education, exam, experience and ethics requirements. A major bonus: All CFPs are fiduciaries.
Find a financial advisor in minutes with Datalign.
But aren’t all financial advisors fiduciaries?
Some people mistakenly believe all financial advisors are fiduciaries. Shouldn’t financial advisors be required to act in the best interests of their clients? Unfortunately, that’s not the case.
Many advisors are held to a suitability standard rather than a fiduciary standard. The suitability standard of care is lower than the fiduciary standard of care. Under the suitability standard, an advisor must recommend suitable products or strategies for their clients. But what’s suitable isn’t always what’s best.
Here’s an example of how the fiduciary standard versus suitability standard could play out.
Your financial advisor finds two investment products with similar risk levels that meet your needs. One will net you a 10% return. The other will net you a 6% return. A fiduciary would recommend the product with a 10% return. A nonfiduciary could discover the product with a 6% return nets them a higher commission and recommend it. They can do so because both products are suitable for you even if you get a lower return.
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Fiduciary vs. financial advisor: Key differences
Here are some critical differences between fiduciaries and financial advisors.
| FEATURES | FIDUCIARY | FINANCIAL ADVISOR |
|---|---|---|
Level of care
| Fiduciaries are held to the fiduciary standard
| Many financial advisors are held to the lower suitability standard of care
|
Scope
| Fiduciaries work in various domains, including finance
| Financial advisors help clients manage their money and make financial decisions
|
Fee structure
| Fiduciaries typically work on a fee-only schedule
| Some financial advisors work on a fee-based schedule. They can also make money from commissions
|
When to use a fiduciary vs. when to use a financial adviser
Fiduciaries are considered the gold standard among financial advisors. They must put your best interests first, which provides valuable peace of mind. Choosing a financial advisor who’s a fiduciary helps ensure you receive recommendations and services tailored to your needs.
Are you comfortable with your financial advisor being held to the suitability standard instead of the fiduciary standard? In that case, a nonfiduciary financial advisor might be appropriate. Ensure you understand how and when they earn commissions, however. They may be incentivized to put their bottom line before yours.
How do I know if a financial advisor is a fiduciary?
The simplest way to determine if an advisor is a fiduciary is to ask. Many fiduciary advisors advertise it on their websites and in their literature. Even if they don’t, they’ll be happy to tell you whether they’re a fiduciary.
Someone who dodges or refuses to answer the question probably isn’t a fiduciary.
These sources can also help you determine whether an advisor is a fiduciary:
- The CFP Board’s Find Your CFP Professional.
- The Financial Planning Association’s PlannerSearch.
- The National Association of Personal Financial Advisors.
How much does a financial advisor cost?
The cost of a financial advisor depends on their services and fee structure.
Many financial advisors charge a percentage of assets under management. A common fee ranges from 0.25% to 1% per year. If you have $100,000 with your financial advisor, you’ll pay between $250 and $1,000 per year.
Some advisors charge an hourly fee instead. Hourly fees often range from $200 to $400. You pay only for the time your advisor helps you. This fee structure is less common.
Advisors paid on a commission basis may have lower — or nonexistent — fees. But this can lead to conflicts of interest by incentivizing them to recommend high-commission products.
Tip: Remember that you could incur management fees on top of advisor fees. For example, you might pay a 0.25% fee for each mutual fund you invest in. These fees go to the investment companies that manage the funds, not to the advisor.
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Frequently asked questions (FAQs)
Financial advisors who are fiduciaries must act in the best interests of their clients. They must do so even when that means putting their clients’ interests before their own. Advisors who fail to do so could face lawsuits or professional consequences.
The best way to know if a financial advisor is a fiduciary is to ask. They should be happy to disclose their level of care. A financial advisor who isn’t a fiduciary can’t claim to be one. You can also research a financial advisor’s credentials on the CFP Board, FPA and NAPFA websites.
Fiduciary financial advisors typically work on a fee-only schedule. This means they charge clients fees instead of earning commissions. The most common fee structure is based on assets under management. The advisor charges a percentage of the assets you have with them.
Other fee structures include flat fees, hourly fees and retainer fees. Ensure you understand ahead of time how much an advisor will cost. This will help you determine whether a financial advisor is worth it.
There’s no definitive net worth at which you need a financial advisor. Instead, get an advisor when you want help managing your finances.
Some advisors have minimum asset amounts they work with, such as $50,000 or $100,000. The higher your net worth, the more options you have.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
Blueprint has an advertiser disclosure policy. The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.
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