What Is A Fiduciary Financial Advisor?
As a financial advisor, you have a responsibility to act in your client's best interests.
But what does that really mean?
For some advisors, it's simply a matter of providing good financial advice and making sure that your clients are happy with their progress towards achieving their financial goals.
For others, it goes deeper than that.
Advisors with fiduciary responsibility are legally bound to put their client's interests first at all times.
If you're not sure what it means to be a fiduciary financial advisor, you're not alone. The term "fiduciary" gets thrown around a lot in the financial world, but it can be hard to pin down exactly what it means.
In this article, we'll explore the concept of fiduciary duty and what it means for financial advisors. We'll cover topics like the legal obligations of fiduciaries, the difference between fiduciary and non-fiduciary advisors, and what happens when you breach fiduciary duty.
By the end of this article, you'll have a clear understanding of what it means to be a fiduciary financial advisor, and why it's such an important concept for anyone working in the financial industry.
What is a fiduciary?
Advisors with a fiduciary relationship act on behalf of their clients.
A fiduciary is an entity, whether an individual or organization, that has a legal and ethical obligation to act in the best interests of the party they are representing or the beneficiary.
It’s also usually someone who manages assets on behalf of an organization, individual, family, or other entity. A few examples of service providers who have fiduciary duties include trustees who manage trusts, attorneys who represent their clients, and corporate officers who manage a company.
What do fiduciary financial advisors do?
Across different specializations, financial advisors will deal with investment management in their careers. In retirement planning, wealth management, and even personal financial planning, most financial advisors will have to provide investment advice to help clients reach their financial goals.
Fiduciary duty is there to make sure that the decisions and advice that advisors give is solely for the client’s best interests and not for the advisor’s benefit.
While some advisors can act in a fiduciary capacity, not all of them are fiduciaries.
Fiduciary duty is a high standard of care that requires the fiduciary to always act in good faith, disclose any conflicts of interest, and provide full and fair disclosure of all relevant facts.
In most cases, financial advisors have a fiduciary duty when they start a working relationship with the client. A fiduciary relationship is necessary for professional financial roles that require a lot of trust.
You’re obligated to disclose any conflict of interest when recommending a financial product, such as an insurance policy, or investment products. Staying transparent is just one of the many duties you have as a fiduciary too.
A few other duties fiduciary financial advisors are responsible for include:
always act in the best interests of their clients
provide investment advice based on accurate and complete information
avoid conflicts of interest and disclose them when they arise
not use client assets for their own benefit
disclose how fees are charged for services,
exercise a duty of loyalty and care when managing clients’ investment portfolios.
Fiduciaries who breach their duty can be held accountable for any damages caused by that breach and may face disciplinary action from regulatory authorities. We’ll talk more about this, but first, let’s find out if you – or the position you’re trying to fill – are responsible as a fiduciary.
Do all financial advisors have fiduciary duties?
No, not all financial advisors have fiduciary duties.
Finding out how a financial advisor gets paid is a good start to discovering whether they’re a fiduciary.
Fee-only financial planners, or those paid only by the client, are often in a fiduciary relationship with their clients. Fee-based or commission-based financial professionals, on the other hand, have other parties that are paying them. Thus, it might be possible that they’re recommending products or investment decisions that will get them a bigger commission.
In addition, Certified Financial Planners (CFP) are also required to act as fiduciaries — as listed in the CFP board‘s code of ethics.
Financial advisors who are registered investment advisors (RIAs) are held to a fiduciary standard, in accordance with the Securities and Exchange Commission’s (SEC) Investment Advisers Act of 1940.
The act requires that financial advisors must be transparent with their clients regarding their actions, fees, and any potential conflicts of interest when providing investment advice. This means they are legally and ethically obliged to act in the best interests of their clients when providing investment advice or managing their assets.
However, financial advisors who are registered as broker-dealers with the Financial Industry Regulatory Authority (FINRA) are held to a different standard of client care known as the suitability standard. This means while they are still required to recommend an investment strategy suitable for their clients based on their financial situation, investment objectives, and risk tolerance, they are not necessarily required to act in the client's best interests.
It’s also important to note that some financial advisors can hold both a broker-dealer registration and an investment advisor registration. If you have both, you may operate under different standards of care, depending on the type of service you’re currently providing.
What happens if fiduciary duty is breached?
If a financial advisor acts in their own self-interest at the expense of their client despite being a fiduciary, then they’re breaching their fiduciary duties. This leads to legal troubles and loss of trust from their clients.
From a legal and regulatory standpoint, consequences can include fines, disciplinary action, suspension or revocation of licenses, or in some cases, criminal charges.
The SEC may investigate the breach and pursue enforcement action against the advisor; the client could file a lawsuit for negligence or damages incurred from any financial losses resulting from the breach.
On top of legal consequences, a breach of fiduciary duty can also affect the advisor’s relationship with their clients — even if said clients aren’t the ones damaged by the breach. This may include loss of trust, dissatisfaction, and potential termination of the client-advisor relationship.
Clients who have been harmed by a breach of fiduciary duty can seek compensation for their losses through legal means.
If a financial advisor has breached their fiduciary duty, it's important that they take responsibility for their actions, make amends to affected clients, and take steps to prevent future breaches.
This may include apologizing to the client, offering compensation or refunds, and implementing new policies and procedures to ensure that similar breaches do not occur in the future. By demonstrating a commitment to addressing the issue and taking steps to prevent future breaches, the advisor can slowly rebuild trust with their clients and mitigate some of the negative consequences of the breach.
Not all breaches of fiduciary duty are intentional. For example, it’s possible that a financial advisor slips up and unknowingly makes inaccurate statements about security. Sure, it’s accidental, but it might end up damaging the client either way — which may result in loss of trust and legal repercussions.
In the end, financial advisory is a relationship business — where trust is needed to build a partnership. That said, human errors are inevitable — all the more reason for advisors to be thorough in their work.
Let Asset-Map help with fiduciary duties
At its core, a fiduciary relationship is based on trust. Being a fiduciary financial advisor means that you have to act in the best interests of your clients.
And a big part of your responsibility as a fiduciary is to be transparent with your clients so they can make the best decisions for their financial situation. This is a two-part process. You’ll have to be honest with your recommendations and advice. And you have to make sure that clients understand what you’re saying.
Asset-Map helps you turn your insights, strategies, and data into intuitive visual maps so you can have better client conversations. Instead of the endless (unread) reports you usually present, Asset-Map helps you direct your client’s attention to things that actually need their attention.
See how Asset-Map turns your client meetings into productive discussions on what your clients should do to hit their goals instead of an endless Q&A session on how you came up with the recommendations. Schedule a demo today to learn more.