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What is a Fiduciary, and what does it mean to you?

By: David Kuzma
August 2, 2023
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August 2, 2023

Do you know what a fiduciary is? If not, you're not alone. Many people don't know what this term means, but it's important to understand it if you're a business owner or entrepreneur. A fiduciary is someone who has a duty of loyalty and care to another party. In other words, a fiduciary is someone who has your best interests at heart and will act in your best interests when making decisions on your behalf. This is an especially important concept to understand if you're entrusting someone with the management of your finances or investments. So what does all this mean for you? Well, if you're looking for financial advice and financial planning, it's important to make sure the person giving it to you has a fiduciary responsibility to do so. Here's how it works:

What does "Fiduciary" mean?

First, the definition of a "Fiduciary" by the Merriam Webster dictionary is, as "of, relating to, or involving a confidence or trust: such as held or founded in trust or confidence" and continues by saying "holding a fiduciary relationship." 

A fiduciary adhere to the fiduciary standard of a duty of loyalty, a duty of care, and a duty to act in good faith. The fiduciary standard is the ethical and legal requirement that a fiduciary acts in the best interests of their clients.

What does being a fiduciary advisor mean?

A fiduciary advisor is someone who has a legal obligation to act in the best interest of another party. When you hire someone as your financial advisor, that person first wants to understand your financial situation and becomes your fiduciary by helping you track and achieve your financial goals. That means they're legally accountable to do what's right for you; because if they don't, that's considered fraud. You see, if your investment advisor can make more money for themselves by making a bad decision on your behalf, they're breaking that legal obligation. Let's say you hire a financial advisor and she recommends a certain mutual fund. She did this because the mutual fund pays her a kickback every time she sends over another investor. This is not acting in your best interest.

What's more, you can't just hire anyone to act as your fiduciary - it has to be someone who the law says is legally obligated to act in your best interest. So if you go see a financial advisor who doesn't have this responsibility or fails to disclose that they are acting on behalf of their interests, you have a right to fire them and find someone else.

In addition, a fiduciary has three duties to adhere to the duty of care, the duty to act in good faith, and the duty of loyalty. All three of these fiduciary duties are part of the ethical oath an investment advisor takes to act in your best interests.

Are all investment advisors and financial advisors fiduciaries? 

No, not all investment advisers are held to a fiduciary relationship. It is the fiduciary responsibility that sets financial advisors apart from other types of brokers, accountants, and tax preparers. It is also this fiduciary responsibility that makes it possible for investment advisors to offer fiduciary advice.

Investment advisors associated with broker-dealers are considered to be held to a "suitability" standard. What that means for you is that investment advisors only have to sell you a product that is a suitable investment for your needs, not necessarily an investment that's going to meet your specific fiduciary standards.

The suitability rule

Typically, brokers and traders are paid by commission. They must satisfy the needs of their clients in most situations. This implies giving suggestions based on client requirements. The FINRA regulations govern brokers, who are obliged to make appropriate recommendations to customers.

It is a much lower standard than the fiduciary rule, which requires investment advisors to act in your best interests. Unfortunately, most financial planners and brokers are not held to any standards of conduct or ethics. Don't ever let anyone tell you they're acting as a fiduciary when they're not. If someone tells you this, it's time for you to find another advisor.

What is the difference between Suitability vs. fiduciary?

The main difference between suitability and fiduciary is that a fiduciary financial advisor has a much more rigorous requirement to act in your best interest. A suitability advisor can recommend strategies that are "suitable" to support your objectives. The Financial Industry Regulatory Authority (FINRA) requires it to be as low as “Your investments can support your objectives”. This means to you, they are not limited to any fiduciary duty.

Just because an investment may be "suitable" doesn't necessarily mean it is in your best interests, whereby a fiduciary must always act in your best interests according to an ethical oath.

The fiduciary duty is described as the highest standard of care applicable to a particular party. It means that fiduciary advisors are required by an ethical oath to always act in your best interest. This promotes trust between fiduciaries and their clients because it holds fiduciary advisors to a higher level of conduct and fiduciary advisors know that their actions will be held to a much higher standard.

For example, the fiduciary duty is similar to an attorney-client relationship. Attorneys always have to act in your best interest and try to get you the best outcome for your specific situation, even if it means losing money for them because they are fiduciaries.

Don't fiduciary advisors just recommend lower-risk investments?

A fiduciary financial advisor should always include investment options that match your specific risk tolerance and objectives, just like any other financial advisor would do. However, fiduciary advisors must always place their client's interests above their own when recommending investment options.

So fiduciary advisors have a fiduciary duty which means that they have a responsibility to place their clients' interests above their own. The suitability fiduciary advisor has a responsibility to place their client's interests in line with their investment risk tolerance and objectives, but it is not always in line with the fiduciary duty to place their interests above their clients'.

How can you tell if your financial advisor is a fiduciary or not?

You can tell which type of relationship your financial advisor has with you by asking if they work as a fiduciary or not. If your financial advisor is a fiduciary, then they are legally obligated to put your best interests first when giving you advice. However, even if your financial advisor is not a fiduciary, they may still be considered "suitable" for you. The Financial Industry Regulatory Authority (FINRA) requires it. 

What is an example of a fiduciary?

An example of a fiduciary is an attorney, doctor, or investment fiduciary. In all professions, fiduciaries take professional pledges to always act in the best interest of their clients and hold themselves to a very high ethical standard.

A fiduciary is an individual or entity with responsibilities to act for another person or group of people, typically in a professional capacity. Trustees (or fiduciaries) have legal title to property and make investment decisions on behalf of the beneficiaries.

What makes working with a fiduciary cost more? What is the benefit?

When it comes down to it, there is no additional fee for having someone act as fiduciary to help you with personal finance and investing vs. one who does not. However, with a fiduciary, you can be sure that your financial advisor is legally obligated to act in your best interest when discussing investment advice and financial assets.

What is the difference between a Fee-Only fiduciary vs. Fee-Based? Do they offer any perks or benefits?

A Fee-Only advisor is compensated through fees for investment management services that are based on a percentage of assets under management, while a fee-based financial advisor receives compensation from commissions and fees paid by product providers. The major benefit to working with a fee-only advisor is that there will be no bias when it comes to which products are recommended. This allows them to provide recommendations in your best interest, knowing that it won’t affect their compensation or relationship with you whatsoever.

The most important aspect of working with a Fee-Only fiduciary or a Fee-Based advisor is knowing exactly what the advisor's fee structure is and how it relates to you.

For example, if during the analysis of building your financial plan, it is discovered that you need additional life insurance, a Fee-Only advisor would need to refer you out to a licensed insurance agent to obtain the policy.

On the other hand, if the advisor was fee-based, he may or may not also be licensed as an insurance agent. If you wanted, he could obtain the policy for you and earn a commission. 

Who should you work with: a Fee-Only fiduciary or fee-based financial advisor?

A fee-only financial advisor can be more expensive than working with a fee-based financial advisor; however, it’s important to note that any fees paid to an advisor go directly towards the management of your assets. This means that every dollar spent on managing your investment portfolio through a fiduciary could result in increased returns and greater value overall. So while it may seem like a more expensive option initially, the result is quite valuable for those looking for long-term success and growth. When considering all of this information, it’s safe to say that anyone looking to grow and protect their assets should work with a fiduciary. The additional cost of working with a fee-only financial advisor is offset by the increased returns and value, which can result in more money saved throughout your lifetime.

Both advisors will be able to help evaluate your current situation and be able to address topics like your personal debt, what to do and how much savings you should have as well as to assess your net worth. They will be able to help determine what mortgage you can afford based on your expenses, credit score, income, and cash. In addition, review your credit report with you to ensure there are no errors on it. A good advisor is there to help you improve your financial literacy to be able to make smart financial decisions with helpful information. 

Who should not work with a fiduciary?

Some people should not work with a fiduciary. If you are looking for short-term gains, a fiduciary is not the right choice for you. A fiduciary is someone who is looking out for your best interests in the long term, and if you are not concerned in that, then it's best to find someone else to work with. Similarly, if you are not willing to disclose your financial information, a fiduciary is not the right choice for you. A fiduciary wealth manager will need to know all about your financial situation to help you make the best decisions for your future. Finally, if you are not interested in working with a team, a fiduciary is not the right choice for you.


When it comes down to it, there is no additional fee for having someone act as fiduciary take care of your finances vs. one who does not. However, with a fiduciary, you can be sure that your financial advisor is legally obligated to act in your best interest. What’s more, working with a Fee-Only financial advisor ensures that any recommendations made are unbiased and in your best interests.

So if you’re looking for someone to help you track your finances and invest with a process to achieve your financial goals, it’s important to work with a fiduciary. It may seem like an added expense at first, but over time you will realize the greater value that comes with this type of advisor.