When it comes to getting advice about your money, you want to have confidence that the guidance you’re getting is in your best interest.
In the U.S., that means working with a financial advisor who has fiduciary status. But here’s something many people don’t realize: not everyone in this profession is required to honor these rules and place your needs ahead of theirs.
Here’s how to make sure your advisor is the best fit for the job and why being fiduciary matters.
Under U.S. law, registered investment advisers (RIAs) are required to act as fiduciaries. They owe clients both a duty of care and a duty of loyalty.
The duty of care means the advisor has to have a reasonable understanding of your financial situation, objectives and constraints, and make recommendations in your best interests.
The duty of loyalty means the advisor has to put your interests ahead of their own. They must avoid or disclose any conflicts of interest. In other words, they can’t place their own financial incentives over your well-being.
The U.S. Securities and Exchange Commission (SEC) reaffirmed in 2019 that these fiduciary obligations can’t be waived away by contract or disclosure (1), so it’s actually illegal for a fiduciary advisor not to act in your best interest.
Now that you know what it is, how can you find out if an advisor is a fiduciary? By doing the following: Ask the advisor. In your first conversation, ask whether they act as a fiduciary in all the advice they provide. If the answer is evasive — or they say “only for some services” — treat it as a red flag.
Use public databases. The Investment Adviser Public Disclosure (IAPD) website is the official U.S. database for RIAs and advisor representatives. Check there to see whether a firm or person is registered, what services they provide, whether there have been disciplinary events and how they are compensated.
BrokerCheck. If your advisor also works in a broker role (selling securities), review their licensing and employment, complaints and violations history via the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck tool.
Ask to see the advisor’s Form ADV. This document must list fees, conflicts, business practices and other facts that would be important for you as their client to know.
Watch for dual roles or “switching hats.” Some advisors are “dual registered,” meaning they act as both fiduciary RIAs and as brokers. When they’re in broker mode, they might be subject to a lower “best interest” standard rather than full fiduciary obligations. Ask when they are acting in each capacity and how they deal with any overlap.
Get a written engagement. A fiduciary should be willing to state in writing the terms of the relationship, acknowledging their duty, defining compensation and disclosing any conflicts.
Keep in mind that there are some limitations. Fiduciary duty covers advice and management, but it doesn’t extend to every financial decision you make — such as purchases outside your advisor’s recommendations.
Advisors may also differ in how they interpret what counts as a “material” conflict of interest, leading to variations in disclosure or client consent. That’s why having a clear written agreement is essential.
And while fiduciaries must disclose conflicts, not all of them can be fully avoided.
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Let’s say your brother-in-law is an advisor and you promised your sister you’d use him.
He’s family, so you think everything should be above board, even if he’s non-fiduciary. But here’s what can technically happen if you decide to go with a non-fiduciary:
Incentive conflicts. You might be pushed toward higher-commission or proprietary products even when cheaper or better alternatives exist.
Less transparency. Non-fiduciaries may not fully disclose how they’re compensated or where there may be conflicts.
Suitability vs. fiduciary. The fiduciary standard requires putting the client’s interests first over suitability. The suitability rule basically says an advisor just has to recommend something that fits your financial situation, goals and needs. But it doesn’t require them to put your best interests first.
That means a broker could suggest an investment that earns them a big commission, as long as it technically checks the right boxes for you.
Fragmented advice. Because non-fiduciaries often focus on product sales, your broader financial situation, like tax, estate planning and insurance, may suffer.
If you’re looking for or working with a financial advisor, make fiduciary status a required checkpoint. Ask the tough questions, check public records, get full disclosure and a written engagement and be aware of any product conflicts.
You’ve worked hard for your money, and it’s important to make sure the people looking after it are working hard for you, too.
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U.S. Securities and Exchange Commission (SEC) (1).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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