By Stewart Darrell, CFA

There is one term that you absolutely need to know when working with a financial advisor— “fiduciary.” It’s one of the most important words out there within the context of financial advice and right at the top with other “sacred” investment tenets like diversification, the law of compounding and investing for the long-term. Unfortunately, many investors don’t understand it well enough, putting their financial well-being at risk. That shouldn’t be you. Here’s what you need to know about what it means to be a fiduciary.

What’s a fiduciary?
It’s not the easiest word to say—you’ll hear it pronounced in several different and sometimes amusing ways. The term originates from the Latin word fiducia, which means trust and being a fiduciary essentially boils down to trustworthiness. Advisors who are fiduciaries follow what’s called the “fiduciary standard of care” and are governed by the SEC and Investment Advisers Act of 1940. They are bound by law to place your best interests first at all times. Furthermore, a fiduciary must provide sound and transparent financial advice, fairly disclose all material facts and avoid or disclose conflicts of interest. The fiduciary duty is the highest standard of care within the financial world.

Fiduciary standard vs. suitability standard
Unfortunately, “financial advisor” and “fiduciary” aren’t synonymous. If an advisor doesn’t operate under the fiduciary standard described above, they typically follow the “suitability standard” and are regulated by FINRA and a different set of rules. This group of advisors usually includes traditional brokerage firms or broker-dealers, insurance agents and advisors working at banks. The suitability standard states that advice must be “suitable” to your financial situation, which can leave a lot open to interpretation. More importantly, it doesn’t require the advisor to put your interests ahead of their own or their employer’s. Under the suitability rule, advisors have difficulty offering objective advice as many are compensated through the products they recommend. This often means that instead of recommending the best investment option for you, they may present a solution that generates the greatest monetary reward for them, typically in the form of sales commissions. Studies by the Department of Labor found that on average conflicted investment advice results in 0.5 – 1.0% less in investment returns each year. In the case of mutual funds, that could mean an estimated $200 – $400 billion total loss for IRA investors over a twenty-year period.1 This is a high price to pay for not working with a fiduciary.

Who’s in your corner?
Now that you understand the two primary standards within the advisory world, it’s time to see which type of advisor is in your corner. The best way to find out is to ask the advisor if they are required to act as a fiduciary 100% of the time. If the answer is “no”, the advisor can legally place their interests ahead of yours in many situations. If the answer is “yes”, the advisor is bound by law to place your best interests first at all times. If your advisor or potential advisor is a Registered Investment Advisor (RIA), ask for a copy of their form ADV. It can be a great resource for you and shows in black and white what being a fiduciary is all about. You’ll find an overview of the firm, its people, services, fees and any conflicts of interest. Full disclosure – these documents tend to be lengthy and dry, but in exchange for your diligence, you should have a good understanding of your advisor’s business.

After having the fiduciary conversation with an advisor, you may like to do some digging on your own. Here are some online resources that can help.

Researching an advisor’s history:

Searching for a fiduciary advisor or planner:

Though not all financial advisors are created equal, there are many that are truly in it with you and willing to hold themselves to the highest standard of care. Ensure that you have a fiduciary at your side that will help you navigate the complexities of the investment world while keeping your best interests at the top of the list.



  1. Employee Benefits Security Administration. Protecting Retirement Savings FAQs. Accessed April 30, 2018.