If you’ve ever stumbled across the term “fiduciary” and thought, what does that even mean? — you’re not alone. It’s one of those words that gets tossed around in finance but rarely explained in plain English. Let’s break it down.
Not All Financial Advisors Are the Same
Until recently, the title financial advisor was used broadly across the financial industry. That’s changed with new regulation from the U.S. Securities and Exchange Commission (SEC), called Regulation Best Interest (Reg BI), which narrowed who can use the title.
Advisors registered with the SEC are required to abide by fiduciary duty. In simple terms, this means they must put their clients’ interests ahead of their own. The SEC defines this as exercising both a duty of care and a duty of loyalty, holding fiduciaries to “the highest standard of conduct.”
So, What Exactly Is a Fiduciary?
The dictionary definitions might not make things much clearer, but here’s the gist: a fiduciary is someone entrusted to manage money or assets for the benefit of another person.
For investors, that means a fiduciary financial advisor has a legal obligation to act in your best interest when giving recommendations. Unlike advisors who may receive commissions for recommending certain products, fiduciaries are bound to disclose conflicts of interest and make recommendations with your goals in mind.
Fiduciary Duty vs. “Best Interest”
Here’s where it gets nuanced. Reg BI set standards for broker-dealers and their representatives, requiring them to act in a client’s “best interest” when making recommendations. On the surface, this sounds a lot like fiduciary duty.
But experts point out that it’s not the same. As Benjamin Edwards, Associate Professor of Law at the University of Nevada, Las Vegas, explains:
“The rule does not say that best interest means that a broker must place the customer’s interests ahead of the broker’s… That still allows brokers or their firms to consider their own pockets when making recommendations.”
In other words, fiduciary duty is a higher standard.
Why It Matters
Research suggests that working with a financial advisor can make a meaningful difference. According to a 2022 Northwestern Mutual study, U.S. adults who work with a financial advisor feel more confident about their ability to achieve long-term financial security.
Additional studies have found that individuals who work with an advisor:
Report greater confidence in their financial decisions.
May end up with about 15% more income in retirement compared to those who go it alone.
And while some people avoid fiduciary advisors because they worry about cost, fees are often more reasonable than expected. A 2021 AdvisoryHQ study found that the average annual fee for a $50,000 account was about 1.18% (roughly $590), and fees as a percentage of assets decrease as account balances grow. For example, a $1 million portfolio had an average annual advisor fee of about 1.02% ($10,200).
The Bottom Line
A fiduciary financial advisor is legally bound to put your interests first. While terms like “best interest” and “fiduciary” can sound similar, the standard of care is not the same. Understanding the difference helps you make more informed choices about who you trust with your financial future.
Sources:
1. “‘Best Interest’ vs. Fiduciary Obligation – Know the Difference”. Center for Retirement Investing. (July 2020)
2. “Planning and Progress”, Northwestern Mutual (2022)
3. "Journal of Retirement Study Winter" (2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
4. "What are the Average Financial Advisor Fees & Investment Fees Being Charged in 2021?", AdvisoryHQ (July 2021) The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the AdvisoryHQ study.