The Importance of a Fiduciary Financial Advisor

By Arturo Conde | AUG 30, 2023

Choosing a financial advisor is all about trust. After all, you’re picking someone who will be responsible for the financial future of you and your family. It’s important that you trust not only their knowledge of finances and markets, but that you trust they will be making the decisions that are most likely to benefit you and yours. While some of this comes down to personal preference and how you gel with someone when you meet them, there are some ways you can tell if a financial advisor is trustworthy. Namely, this involves finding out if they are a fiduciary. If you want help finding a financial advisor, consider using SmartAsset’s free financial advisor matching tool. 

Fiduciary Standard vs. Suitability Standard

A fiduciary financial advisor is defined by adherence to the fiduciary standard. There are several rules that fiduciaries must always live up to:

• Put the client’s best interest ahead of their own, finding best prices and terms.
• Act in good faith, providing all relevant information to clients.
• Avoid conflicts of interest and tell clients of any potential conflicts that do exist.
• Make best efforts to ensure advice is accurate and thorough.
• Avoid using client assets to benefit themselves.

The other standard that you’ll often see among financial professionals is called the “suitability standard.” This is less stringent than the fiduciary standard. Recommendations must only be “suitable” for the client, not necessarily in their best interest. This is obviously a much looser standard with more room for interpretation.

Furthermore, there are fewer strict rules regarding disclosing conflicts of interest. These could include things like commissions an advisor may receive by recommending a financial product like an annuity. Someone held to the suitability standard may also ultimately be loyal to the broker-dealer they work with, rather than the client.

Why a Fiduciary Financial Advisor Is Important

You have a lot of decisions to make when it comes to choosing a financial advisor, and many of them come down to personal preference. The investment options, for instance, could depend on what your personal goals and investment philosophy look like. Under nearly all circumstances, though, an individual investor is going to be best served by a fiduciary advisor.

Simply put, you want to make sure that the person who’s making financial decisions on your behalf is looking out for you and your family’s best interests, not trying to pad their own bank accounts. The only way to be sure of this is to get an advisor who is legally held to the fiduciary standard.

One exception to this would be if you’re fairly confident in your investment abilities and are simply looking for someone to execute trades for you. In this case, you could use an advisor held to the suitability standard. However, there would also be other, lower-cost options available, like using an online brokerage account.

How to Tell If An Advisor Is a Fiduciary

The simplest way to know if a potential advisor is a fiduciary is to ask them. While this might seem slightly uncomfortable, remember that this is a professional relationship. In the end, you’re trying to figure out if someone is the best person to manage your finances, a topic of intimate importance to you and your future. 

Even without talking to an advisor, though, there are ways you can tell if an advisor is a fiduciary simply by looking at their fee structure. You can find their fee structure by perusing an advisor’s Form ADV data, looking at their website or simply asking them directly.

If an advisor is fee-only, that means they only earn fees directly for financial management and investment services. These advisors are very likely to abide by the fiduciary standard. A fee-based advisor, conversely, earns both the above fees and commissions for buying and selling securities or insurance products. This person may be a fiduciary, but the standard may be conditional based on whether they are acting as an advisor, an insurance agent or a broker-dealer. If an advisor purely gets paid on commission, they are likely not a fiduciary. 

Bottom Line

A fiduciary financial advisor is one who’s required to always keep your best interest in mind when making decisions. They cannot sell you products or make investments that don’t have a strong case for being in the best interests of you and your family. This is true even if they fit the definition of “suitable.” A fiduciary financial advisor is generally the best choice for financial planning, as they always have to think about you rather than their own pocketbook.

Tips for Finding a Financial Advisor

• There are many types of financial advisors, and it can be difficult to sort through the names. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Before you speak with a financial advisor, it can be helpful to have a general idea of what you’d like your portfolio to look like. Use SmartAsset’s free asset allocation calculator to see how you should be spreading your money out given your age, risk profile and goals.

Photo credit: iStock.com/kate_sept2004, iStock.com/VioletaStoimenova