A fiduciary is a person, such as an attorney or trustee, who has a legal or ethical duty to act in the best interests of another person or group of persons.  For example, an attorney has a fiduciary duty to act in the best interests of the client, and the trustee has a fiduciary duty to act in the best interests of the beneficiaries of the trust.  Fiduciaries MUST NOT put their own interests ahead of the interests of the beneficiaries or clients, or they will be faced with legal and ethical problems, including civil liability and possible criminal penalties.   

Financial advisors in the investment world can also be fiduciaries. However, not all financial advisors are fiduciaries, and you might be surprised to learn that many are free to sometimes place their own interests, or that of their organization, ahead of your own.  Believe it or not, it is quite common, and absolutely legal, for non-fiduciary financial advisors to recommend financial products or investments that maximize their own commissions, even if they may not be the greatest fit for your needs.   

For example, advisors who work for a brokerage selling and buying securities are often NOT fiduciaries.  This is especially true when it comes to “commission-only” financial advisors that are seeking to profit by selling certain financial products or investments.  Instead of complying with a fiduciary ethical duty to place the interests of their clients ahead of their own, they’re merely required to have a reasonable belief that an investment, transaction, or number of transactions are suitable for their clients.  See the Financial Industry Regulatory Authority (FINRA).  Of course, what might be reasonable to one person certainly may not be to another.  Therefore, the reality is that non-fiduciary advisors are often guided first by how much of a commission they can make for themselves or their organization before they worry about your interests.   

To be clear, not all advisors that work on commission place your interests on the proverbial backburner.  For example, your advisor likely will receive a commission when selling life insurance, and there’s nothing wrong with that.  As a trustee, before working with any such commission-only advisors, you need to first confirm that they are in fact fiduciaries to ensure that their primary motivation is serving your best interests.   

In contrast, a fiduciary financial advisor MUST comply with two specific requirements to satisfy the advisor’s fiduciary duty.  The first requirement is a duty of care, pursuant to which the advisor MUST make informed investment decisions after carefully reviewing all available information.  This duty of care includes doing a “deep-dive” into your financial situation before offering any advice or making any recommendations, to ensure that such recommendations are cost-effective.    

Second, the fiduciary financial advisor has a duty of loyalty, pursuant to which the advisor MUST disclose any personal or economic conflicts of interest.  For example, if the advisor is selling anything upon which the advisor may receive a commission, the fiduciary advisor MUST disclose this to the client to fulfill this duty of loyalty.  Compliance with BOTH the duty of care and the duty of loyalty ensure that the advisor has placed your interests in front of all others. 

The good news is that most financial advisors who work as Registered Investment Advisors and Certified Financial Planners are usually fiduciaries.  That is why it is recommended that trustees hire RIAs or CFPs, as opposed to advisors working for a brokerage, to manage trust investments.  This allows a trustee to satisfy the fiduciary duty owed to the trust beneficiaries.  In a nutshell, the best practice is always to confirm the advisor’s fiduciary status before you retain them.    

As you can see, it is well worth the time and effort for trustees to identify and retain a financial advisor who is also a fiduciary.  A fiduciary financial advisor that adheres to the duties of care and loyalty to the client will preserve, and probably make, much more money for the client, be it an individual, group, or the beneficiaries of a trust.