What Is a Fiduciary and Why Is It Important?

Christian Worstell
In this article...
  • Learn the answer to the question, "What is a fiduciary?" Discover the legal obligations of fiduciaries, and find out how to find a fiduciary financial advisor.

When you're thinking of hiring a financial professional to help you manage your money or investments, the term "fiduciary" is likely to pop up frequently.  Before you hand over control of your finances, it's important to understand how a fiduciary relationship can benefit you. Learn more about what a fiduciary is below.

What Is a Fiduciary?

A fiduciary is a person or an organization that's typically responsible for managing someone else's money, property or well-being. As part of that role, the fiduciary has a legal obligation to act for the benefit of the other person, rather than themselves. Examples of possible fiduciaries include financial advisors, insurance agents, real estate agents and money managers.

In some cases, the fiduciary relationship is not focused primarily on money. Doctors, lawyers and guardians all have a fiduciary duty to their clients. Although they may not be managing your money, they must still put your interests ahead of their own.

Understanding Fiduciary Duty

When someone has a fiduciary duty to you, they usually need to follow a few key guidelines:

  • Act in your best interests
  • Take care with your money or property
  • Maintain accurate, complete records
  • Keep your assets separate

Different types of fiduciary relationships may come with different responsibilities. Your doctor has a fiduciary duty to you as a patient, which means they can't breach doctor-patient confidentiality or recommend unnecessary treatments to increase profits. The fiduciary duties of real estate agents, on the other hand, include full disclosure about properties and purchase offers.

Who Can Be a Fiduciary?

A person doesn't need to be a financial professional to be a fiduciary. You can appoint a fiduciary using a power of attorney (POA). For example, if you wanted your adult child to manage your money and property, you could name them as your fiduciary via POA.

Guardians of property are also considered fiduciaries in the eyes of the law. These individuals are directed by a court to manage another person's assets, usually when they're not able to do so themselves.

Trustees — people who decide how to manage the money and assets in a revocable living trust — are another type of fiduciary. Estate executors also have a fiduciary duty to their clients.

Keep in mind that different states may have different rules around who can and must hold a fiduciary duty; make sure to check the laws in your area. 

Is Every Financial Professional a Fiduciary?

No — not all financial professionals are fiduciaries. This is an important distinction to understand, especially if you're planning to trust another person with your money or retirement planning efforts.

It's up to you to determine if a financial professional is also a fiduciary. If you want to be certain, look for people with one of two designations:

  • Certified Financial Planner (CFP): Every CFP is certified by the Certified Financial Planner Board of Standards. Once a financial professional becomes a CFP, they're agreeing to carry out a fiduciary duty to their clients. The CFP board offers a certification verification tool to help you check an individual's status.

  • Registered Investment Adviser: These professionals are registered with and regulated by the U.S. Securities and Exchange Commission (SEC); they are legally bound to offer fiduciary duty to their clients. Registered advisers must stick to strict rules that protect clients' assets. You can check the registration status of an individual or a firm on the SEC website.

Are you considering using a robo-advisor as part of your investment strategy? Some services, including Betterment and Wealthfront, are registered with the SEC, which means they're also fiduciaries. While these services use algorithms that are programmed to act in your best interests, there's some debate about how well they can perform this job.

How Is a Registered Representative Different From a Fiduciary?

As you're evaluating financial professionals, you might see the term "registered representative." People with this designation usually work for a Broker-Dealer that's registered with the Financial Industry Regulatory Authority (FINRA). You can check registration status using FINRA BrokerCheck.

A registered representative is bound by a
suitability standard. This FINRA rule requires professionals to recommend investments or transactions that they reasonably believe are suitable for the customer's investment profile. Your profile includes factors, such as tax status, age, financial situation and risk tolerance, among others.

The suitability standard gives financial professionals a great deal of flexibility in choosing investments. If they have the choice of two investments that suit your investment profile, they're free to choose the one that gives them the higher commission — they have no obligation to act in your best interests. 

In contrast, a fiduciary must choose the investment that's best for you, regardless of their own financial interests.

What Happens When a Fiduciary Breaches Their Duty?

If you suspect that your fiduciary has breached their legal obligations, the first step is to contact a lawyer. Laws and procedures can vary from state to state, so it's important to have a knowledgeable attorney on your side. In most cases, your recourse is to file a lawsuit or enter mediation. If the evidence weighs in favor of your argument, you may be awarded damages or other compensation.

When it comes to problems with registered financial advisors, you can also report the issue to the SEC, FINRA and your state government. 

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with HelpAdivsor.com. He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at Mike@MyHelpAdvisor.com.

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