What is a fiduciary financial advisor?

What the word means

Fiduciary is a legal term for someone who looks after your money and has to put your interests first while they do it. Under federal law, every investment adviser is a fiduciary to its clients.

The SEC spelled out what that duty includes in a 2019 interpretation. It has two parts:

• A duty of care. The adviser has to give advice that's in your best interest, based on your goals. That starts with asking about your finances, your investing experience and what you're trying to do. In an ongoing relationship it also means watching your accounts over time.
• A duty of loyalty. The adviser can't put their interests ahead of yours. Any conflict of interest has to be removed or disclosed clearly enough that you can agree to it knowing what it is.

The duty can't be switched off

The duty applies to the entire relationship, and the SEC says it can't be waived. A contract can set the scope of the work (a one-time plan is a lot narrower than managing your accounts every day), but the adviser is still a fiduciary for whatever they agreed to do.

How it compares to a broker

Brokers follow a different SEC rule called Regulation Best Interest, which took effect June 30, 2020. It also requires a broker to act in your best interest and not put the firm's interests ahead of yours when recommending an investment.

The difference is when the duty applies. Reg BI applies at the time the broker makes a recommendation. An investment adviser's duty runs through the whole relationship, including the monitoring that happens between recommendations. Some professionals are registered as both, so it's fair to ask which role they're in for a given piece of advice.

Fiduciaries still have conflicts

A fiduciary isn't conflict-free. Registered advisers and brokers that work with retail investors have to give you a short document called Form CRS, which lists their fees, their conflicts of interest and their disciplinary history.

Here's what ours says about how we're paid:

• We charge a fee based on the assets we manage. The more you invest with us, the more we earn, so we have a reason to want you to invest more with us.
• Some of our advisors are licensed insurance agents. If one of them arranges insurance for you, they receive a percentage of the insurance-related charges you pay. You're under no obligation to buy insurance through anyone we recommend.

Questions to ask any advisor

These work on anybody (us included):

• Are you a fiduciary for everything you do with me, or only some of it?
• How do you get paid, and what conflicts does that create?
• Can I see your Form CRS?