Is Your Financial Advisor a Fiduciary 100 Percent of the Time?

by | Jul 30, 2020

“Fiduciary” is a an important-sounding word whose meaning is sometimes vague or confusing. Most people associate it with finance and responsibility, which is correct. Its origin, however, is actually in law. Investopedia defines it this way:

“The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other’s best interests.”

It is used differently in different contexts, and that creates confusion. The financial services industry has adopted the word and uses it often—perhaps too often. It is also used in the nonprofit sector and in other business settings.

You should have a clear understanding of the meaning “fiduciary,” because it has tremendous significance for you and your investments.  You could even be a fiduciary yourself and not even know it.

Fiduciaries in Wealth Management

There are two basic types of financial advisors in America: fiduciaries and brokers.  They are subject to different regulations and “standards of care” for their clients.

Fiduciaries must act in their clients’ best interests; this is called the fiduciary standard.  Brokers are held to a lower “suitability”standard, which means they are required to do what is appropriate but not necessarily what is best for their clients or what the clients really want.

Not surprisingly, one study showed that nearly half of all Americans mistakenly all financial advisors are required by law to act in their clients’ best interests. A similar study showed that 65 percent of those who work with financial advisors incorrectly believe that they only make recommendations that are in a client’s best interest.

To make things more confusing, financial advisors can be registered as both fiduciaries and brokers, creating a hybrid situation. This is often seen in advisors who work for big brokerage firms.  For example, they may charge a fiduciary fee for managing part of a client’s portfolio and then take commissions, 12b1 fees or other kickbacks for different parts of the portfolio.

This is why it is important to ask your advisor if he or she is held to the fiduciary standard 100 percent of the time.

In my 30-plus years of being a financial advisor I have seen some horrible things.  I have seen investors loaded with proprietary mutual funds and annuities that carry ridiculously high fees and have terrible performance records.

I have also seen “one size fits all” investment advice where the advisor purports to create a customized financial plan but is actually selling the same products to almost every client. Then there is the “set it and forget it” approach in which investors are sold certain investment products and they never see their advisors again, which creates huge issues with asset allocation.

What is interesting is that in America we hold doctors, lawyers, and CPAs to the fiduciary standard but not investment professionals.

Can you imagine your doctor writing you a prescription, and you find out later it was for a drug that might help but is not the best choice based on current medical studies?

Or that the doctor received extra compensation for writing the prescription?  This type of self-dealing behavior would get you disbarred if you were an attorney or cause you lose your license if you were a physician. But it happens all the time in the financial services industry.

If you haven’t already done so, ask your financial advisor if she or he is a fiduciary and not a broker. Not all financial advisors are the same.  And to repeat, make sure your advisor is a fiduciary all of time, and not a hybrid advisor.

Are you a fiduciary?

Investors are often surprised to find that they may be functioning as fiduciaries and are therefore subject to legal guidelines and actions.

If you serve as trustee for a trust, or own a company that offers a retirement plan, or serve on a board that is responsible for managing an institution’s funds, you are a fiduciary.

Just as fiduciary advisors must act in your best interests, you must always act in the best interests of the trust or organization you are serving; the rules are just a bit different.

Over the decades laws and rules have been developed to define the best practices for this type of fiduciary. There are the “Fiduciary Standards of Care” which are industry accepted best practices and there are laws such as the Uniform Prudent Management of Institutional Funds Act, which specifically details the steps organizations must take to manage their portfolios in a fiduciarily-responsible manner.  These best practices and laws overlap each other.

These standards of care include the requirement of an Investment Policy Statement, the use of prudent experts, diversification requirements, conflicts of interest rules and many other best practices.

I remember visiting Ireland years ago. I went to a restaurant and ordered my meal.  The server asked what side I wanted, and I ordered a baked potato. I was surprised that my meal came with both French fries and a baked potato.  It seemed that everyone got fries whether they were ordered them or not.  Likewise, you may be a fiduciary whether you asked for it or not.  The difference between you and your financial advisor is that your financial makes a conscious choice.

FourThought Private Wealth is owned by FourThought Financial Partners, LLC (FFPLLC) an SEC-registered investment advisor. For information pertaining to FFPLLC please contact FourThought Private Wealth or refer to the SEC’s website, This presentation is provided for informational purposes, not as personal investment advice. This presentation may contain certain forward-looking statements which indicate future possibilities. Any hypothetical example is intended for illustrative purposes only and does not represent an actual client or an actual client’s experience, but rather is meant to provide an example of the process and the methodology. Any reference to a market index is included for illustrative purposes. It should not be assumed that your account performance will correspond directly to any benchmark index. There is no guarantee views and opinions expressed herein will come to pass. Past performance is no guarantee of future results.