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Everything You Wanted to Know About Fiduciary Financial Advisors

Without needing to schedule a meeting!

Chances are, you have had someone act as a fiduciary toward you before. And, chances are, you've acted as a fiduciary to someone else as well. Whether or not you can define the term or have a legal obligation to act as a fiduciary, fiduciary actions play a critical role in both finance and life.

What is a Fiduciary Financial Advisor?

A fiduciary financial advisor is legally and ethically required to work in the best interests of their clients. While their responsibilities are similar to those of a financial advisor, their status as a fiduciary changes the implications of their actions: namely, there are consequences if a fiduciary financial advisor breaches their legal duty of acting in their client’s best interest.

The suitability standard, which is the standard for non-fiduciary advisors, only requires financial professionals to offer products and services suitable for their clients. This does not necessarily consider the client's best interest, but merely whether or not a financial product is appropriate for their situation.

The fiduciary rule, on the other hand, ensures that financial professionals provide their clients with the best prices, terms, relevant facts, and education to keep them informed about their assets.

Fiduciaries have two main duties while serving clients:

  • Duty of care. Under this requirement, fiduciaries must review all available information before making recommendations or plans.
  • Duty of loyalty. This is a requirement that a fiduciary not use their position to further their own interests. 

Almost anyone can act as a fiduciary because, technically, all you need to do is act in the best interest of another. However, there are legal obligations associated with being an acting fiduciary advisor that are based on trust law. The professional, who must adhere to fiduciary principles, acts as a trustee, and the client as the trustor.

The fiduciary standard is the highest legal obligation that one can have to another person.

Are All Financial Advisors Considered Fiduciaries?

In short, no.

Financial advisors who work for brokerage firms aren’t typically fiduciaries. Fiduciary financial advisors typically work for Registered Investment Advisors, or RIAs.

An RIA is a company or individual financial advisor - or any advising group with employee ranges between these - that provides their clients with financial advice. Unlike many other financial advisors, RIAs have to act under fiduciary duty. This is because they are either registered with the Securities and Exchange Commission (SEC) or state securities regulators.

An investment advisor representative, or IAR, is a financial professional who works under the umbrella of an RIA. IARs are one type of fiduciary financial advisor that requires certain accolades to practice. To become an IAR, an individual must either:

  • Pass the Series 65 exam, or
  • Pass both the Series 7 and Series 66 exams

In some states, professionals may be able to use a designation like certified financial planner (CFP) or chartered financial analyst (CFA) instead of passing the Series 65.

It's important to note that not all CFPs and CFAs are IARs, and not all IARs are CFPs or CFAs.

To know if an advisor is a fiduciary, make sure you double-check with them before working with them.

Types of Fiduciaries

There are several types of fiduciary financial advisors offering different specializations and expectations for client relationships. These include:

  • Fee-only fiduciaries charge a flat rate, an hourly fee or a percentage of assets under management (AUM).

  • Certified financial planner (CFP) fiduciaries are held to the fiduciary standard when they are providing financial planning. Their fiduciary standard includes a duty of care, a duty of loyalty, and a duty to follow their client's instructions. Note: being a CFP does not automatically make you a fiduciary.
  • Registered investment advisors (RIAs) are always fiduciaries in accordance with the Securities and Exchange Commission's Investment Advisers Act of 1940.
  • Department of Labor (DOL) fiduciaries provide investment advice to retirement investors, including 401(k) plan participants or individual retirement account owners. As long as the advice given is tied to a retirement account, the DOL requires these advisors to act as fiduciaries. If they start advising on nonretirement, however, the DOL no longer (legally) requires advisors to act as fiduciaries.
  • Voluntary fiduciaries are not necessarily registered with the SEC or DOL but have pledged to adhere to the fiduciary standard.

What Happens If Fiduciary Duty Is Breached?

Some examples of a breach of fiduciary duty include:

  • Making an excessive number of trades to make commissions (account churning)
  • Exchanging investments without permission
  • Using a client account to purchase stocks for oneself
  • Negligence
  • Not communicating conflicts of interest linked with investments
  • Misrepresentation, or making an untrue statement about a transaction.

There are consequences if a fiduciary breaches their duty of acting in their client's best interest. When fiduciary financial advisors breach their duty, they can be subject to civil liability and professional disciplinary sanctions. This could involve a suspension from practice, or the advisor might be barred from the industry.

What Can You Do If Your Advisor Breaks Their Fiduciary Duty?

If you think your financial advisor breached their fiduciary duty, you'll want to end the relationship immediately. If you experienced damages due to the breach of fiduciary duty, you may be able to file a civil claim to recoup those damages. Filing a claim will require proof that your advisor is a fiduciary, they breached their duty of care and you incurred damages due to the breach.

If your claim is successful, you may be awarded damages. The advisor will face disciplinary action, such as being ordered to pay a fine. They will also have disciplinary action added to their record, which can damage their reputation and career. You can review a fiduciary financial advisor's disciplinary action through BrokerCheck.


How Much Does a Fiduciary Charge?

Fiduciary financial advisors have different ways of charging for their services.

Some advisors charge a fixed fee for certain services or hourly fees to work with you. Those can range, as an estimate, from $7,000 to $55,000 or more on the fixed fee end and $120 to $300 per hour.

Others charge a percentage of the client's assets, on average roughly 1% of the assets under management (AUM) that you provide them to invest. That is roughly $10,000 annually for every $1 million they manage.

Before working with a fiduciary financial advisor, check with them about how they plan to charge you for the services you need. Make sure you understand any commissions they may earn for the sale of financial products to you before agreeing to work with them.

5 Common Misconceptions About Fiduciary Financial Advisors

Misconception #1: Every Financial Advisor Is a Fiduciary

Technically, it's possible for every advisor to as as a fiduciary. However, to actually be a fiduciary requires a legal or professional and an ethical commitment to the best interests of clients.

The fiduciary relationship may be defined by law, but only some advisors have committed to the legalities of always putting clients first.

The fiduciary relationship may also be a professional commitment. A certified financial planner (CFP), for example, is bound to the fiduciary standard by the Code of Conduct of the National Association of Personal Financial Advisors (NAPFA).

Misconception #2: Fiduciaries Always a Test or Earn a License

Fiduciaries are fiduciaries because of their actions, not their designations.

To become a fiduciary financial advisor, you may need to earn a fiduciary license, depending on your state. If you are interested in becoming a Certified Financial Fiduciary (CFF), you can explore the specific requirements in your state with this resource on Indeed.

As a client looking for a fiduciary financial advisor, however, designations and certifications can be indicative of the time and effort an advisor put into learning the industry, which often reflects positively on the time and effort they will put into clients.

Misconception #3: Fiduciaries Guarantee a Profit or Protection from Losses

No one knows everything or can anticipate everything. While fiduciaries act — to the best of their knowledge — in your best interests, losses can always happen and profit might not.

Misconception #4: Fiduciary Law Is Easy to Enforce

Fiduciary financial advisors who breach their duty may face tough civil and criminal penalties. However, it can be difficult to prove a breach of duty in court.

Fiduciaries cannot guarantee profit or protection from loss, even while doing their duty towards clients. A case against them must prove that they acted maliciously and in the interest of another party.

Misconception #5: Fiduciaries Are Always Honest

Most fiduciary financial advisors are in the business to help people, and they will not knowingly advise a client to take actions contrary to their best interests.

Still, as in any industry, there will be people who violate the rules of fiduciary conduct.

Always do your research and ask questions before hiring a professional to manage your money. If anything seems suspicious, trust yourself and find somebody else.

How Do I Find a Fiduciary Financial Advisor?

Before looking into fiduciary financial advisors, you need to determine what specific help you need and your ideal budget. When you first meet, you’ll need to sit down and explain your needs.

It might be helpful to hire an advisor if:

  • You recently inherited money or assets
  • You want to begin investing
  • Your employer offers a 401(k) and you want to compare options
  • You need to re-manage your assets (like after a divorce)
  • You are considering starting or restructuring a small business
  • You are approaching retirement
  • You want long-term management advice for a house or other investment
  • You want to create a trust fund or begin estate planning
  • You need to help a close relative with their finances
  • You need a second opinion on your financial habits and investments
  • You want to create a college or medical fund for a dependent

Many fiduciary financial advisors are available for one-time or short-term consultations, while others specialize in full-time advising.

Determine what you want to accomplish with a fiduciary financial advisor and research qualified providers in your area. Consider meeting with a few different advisors before deciding who to work with. Always ask questions about the fee structure and overall services.

Looking For A Fiduciary Financial Advisor in Austin?

Do you live in Austin, Texas or the surrounding areas and want to work with a fiduciary financial advisor?

The team of professionals at Strategic Investment Management is full of dedicated fiduciaries who can help you develop a sound financial strategy that prioritizes giving you the financial insight at our disposal. Visit our website to learn more.

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