What is a fiduciary?
Simply put, a fiduciary is an individual or entity with the power to act on behalf of another person or organization. That means they must act with integrity and in good faith when making decisions on behalf of their beneficiaries or clients.
These relationships are most commonly present in the financial world. Individuals who assume these roles can include:
- Money managers, including financial advisors and planners
- Accountants
- Attorneys
- Executors
- Board members and corporate officers
Where this standard comes from
This duty came about as a way for regulatory organizations like the Securities and Exchange Commission (SEC) to oversee financial advisors' actions. It all started with the Investment Advisers Act of 1940.
It's worth noting that the SEC released a clarification of fiduciary duty in 2019. The "40 Act" established the guidelines naming activities that qualify as "investment advice" and which financial advisors are subject to a fiduciary duty. When determining if an advisor is subject to this duty, the Act applies three criteria:
- The type of advice offered
- How the advisor is compensated
- Whether or not providing investment advice is their primary job
For people seeking advice, it can be difficult to determine who is and isn't required to act as a fiduciary. The good news is that you can still find one if you know where to look and ask the right questions.
What a fiduciary actually does
Here is where things start to get a little confusing. Under the '40 Act, a financial advisor must act as a fiduciary when providing advice or recommending securities. This includes things like buying or selling stocks, mutual funds, or exchange-traded funds.
In addition, the Act covers how advisors are compensated for the advice they give, such as whether they charge a commission or an asset-based fee. That's it. It only covers investment-related advice.
What the Act doesn't address is any advice related to other essential financial planning topics like insurance, taxes, and estate planning.
Investment advisors who work exclusively with retirement plans such as 401(k)s and 403(b)s are also held to the fiduciary standard. These individuals may advise on the overall design and investment selection and must always act in their client's best interests.
However, the standard does not specify the types of fee models that advisors can use. Therefore, an advisor can still be a fiduciary and receive a commission for investment advice. To stay compliant, all they have to do is act in your best interest and disclose how they are paid and any conflicts of interest.
The difference between fiduciary and "best interest"
Ensuring your financial advisor is a fiduciary is a good start, but it's not everything. When talking to a potential advisor, always ask if they are bound to always act as a fiduciary.
This is important because some advisors are held to a "best interest" standard, which is different. These advisors are governed by a separate SEC rule called Regulation BI, or Best Interest.
While this may sound similar, it's actually a much lower standard. Regulation BI requires advisors to act in your best interest at the time of a recommendation. However, unlike the fiduciary standard for RIAs, this is generally a transactional requirement rather than an ongoing duty to monitor your entire financial picture.
How to find the right partner for your journey
The financial services landscape can be flat-out confusing, but we have some good news. There's an easy way to find a financial advisor who is a fiduciary and will provide the guidance you need.
First, always look for an advisor who is a Certified Financial Planner® Professional. A CFP® professional is not only held to a fiduciary standard, but that standard applies to all financial planning advice, not just guidance on your investments.
In addition, CFP® professionals are held to rigorous education and experience requirements that make the certification the gold standard in the industry. They must demonstrate industry-leading knowledge including:
- Retirement planning
- College planning
- Investment management
- Taxes
- Insurance
- Estate planning
- The psychology of money
Why the Facet approach is different
At Facet, we believe you have a right to know exactly who is handling your financial life. We don't just rely on minimum standards. We pair you with a CFP® professional who is dedicated to looking at your entire financial picture, not just your investment portfolio.
Because CFP® professionals are held to that higher standard across all advice - including taxes, insurance, and estate planning - you get a partner who is truly looking out for your long-term wellness. We believe finding a partner you trust is critical to enjoying the life you want to live.
