A fiduciary financial advisor is independent and someone who puts your (the client) interests ahead of their own at all times. The true definition of a fiduciary is someone “held or founded in trust or confidence.” And according to the Cornell School of Law, a person with a fiduciary duty is held to a higher standard and has a duty of care, loyalty, good faith, confidence, prudence, and disclosure. All of these combined ensure that a fiduciary financial advisor will always work in your best interest and not have any conflicts of interest. Should your financial advisor be a fiduciary? The answer is yes! When searching for a financial advisor, always make sure they are acting in a fiduciary capacity and not in a suitability capacity, which is significantly less stringent. Insurance companies and investment banks act in a suitability standard whereas a Registered Investment Advisor (RIA) is held to a fiduciary standard.

How do I know if my financial advisor is a fiduciary?

Whether you are already working with a financial advisor or are searching for a financial advisor, the first question is to simply ask the advisor: “are you a fiduciary advisor?” If the advisor claims to be fiduciary, insist that they sign a fiduciary pledge (or oath) to always put your interests ahead of their own and to avoid all conflicts of interest. You can find a sample one here. A true fiduciary financial advisor is also independent, meaning they are not connected with any investment bank or insurance company where they may be financially incentivized to sell you products you do not need. All Fee-Only financial advisors are fiduciaries. You can also search the Securities and Exchange Commission (SEC) website to see if your advisor is an RIA. Once on the site, you can search by the advisor’s name, the name of their firm, or their CRD/SEC number. The SEC website will also let you know if the advisor has had any complaints filed against them. 

What is a Registered Investment Advisor (RIA)?

A Registered Investment Advisor (RIA) is an investment firm or person who advises and manages money on behalf of their clients. RIAs must act in a fiduciary capacity. The term RIA is a federal law from the Investment Advisers Act of 1940 which gave rise to the RIA industry. An RIA must be registered either within their state or with the Securities and Exchange Commission (SEC). RIAs who manage assets of $100 million or more are registered with the SEC whereas RIAs who manage less than $100 million are registered within their home state. A state registered RIA may also have to register in other states if they have clients in that state.

How does a fiduciary financial advisor get paid?

First and foremost, fiduciary advisors are only paid by you, the client. This ensures that they only work for your benefit and that they have your best interest in mind. Most fiduciary advisors are paid by a percentage of the assets they manage, also known as AUM (Assets Under Management). The cost for a fiduciary financial advisor starts at 1% a year on the assets they manage and declines with larger portfolios. Fiduciary financial advisors may also do one-off engagements such as a one-time financial plan, investment review analysis, or insurance review.

Does a CFP have a fiduciary responsibility?

It depends. The CFP Board updated their Code of Ethics and Standards of Conduct on October 1, 2019 to state that CFPs must act in a fiduciary duty at “all times when providing financial advice to a client.” Therefore, the answer depends on if the CFP is “providing financial advice to a client.” If the CFP is providing financial advice to a client, then the CFP has a fiduciary duty to the client; however, if the CFP is not providing financial advice to the client, then the fiduciary standard does not apply.  

What is a Fee-Only financial advisor? 

A financial advisor must be independent to give you unbiased financial advice for your best interest. If a financial advisor is paid by you and is also financially incentivized to recommend certain products or services, then their independence is compromised. A Fee-Only financial advisor is only paid by the client and as a result is independent from any bias. There are three ways a financial advisor is paid: (1) commissions from the sale of a product such as life insurance or a variable annuity; (2) commission and fee-based where you pay the advisor for their service, but they also receive money from recommending certain products or services to you such as a home equity line of credit through their bank or some affiliate; and (3) Fee-Only where advisor is not paid by anyone except for you the client. In addition, a Fee-Only advisor adheres to a fiduciary standard. Do not be confused by the term Fee-Based which was created by insurance companies and investment banks to confuse the public. Fee-Based advisors may also earn a commission and/or income from other sources, but only a Fee-Only advisor is only paid by you.

Fiduciary Duty versus Suitability Standard

What is the difference between an advisor who adheres to a fiduciary duty versus a suitability standard? The difference is significant and it is important to fully understand what type of a financial advisor you are working (or plan to work) with. 

Looking for an independent fiduciary financial advisor who can advise you on investments, retirement, real estate, alternative assets, and taxes? Contact ACap Advisors & Accountants to schedule a free initial consultation. Our clients include individuals, small businesses, entrepreneurs, and anyone serious about saving and investing for their future.

Ara Oghoorian, CFA, CFP, CPA is the founder and president of ACap Advisors & Accountants in Los Angeles, CA.