A fiduciary is a person given the power to act on behalf of another in situations that require great trust, honesty and loyalty.
Fiduciaries are hired to act in your best interest and must set aside personal motives and conflicts of interest in favor of pursuing the best outcome for your unique situation. Common fiduciaries include attorneys, accountants, business advisors, fee-only financial advisors and registered investment advisors, real estate agents acting on your behalf, estate administrators, guardians, title companies, and trustees of a trust.
There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are not considered fiduciaries:
- Stock Brokers
- Insurance Agents
- Real Estate Agents acting on the other party’s behalf
What is Fiduciary Duty?
Also called “fiduciary obligation”, fiduciary duty is a legal obligation of a fiduciary to act in the best interest of a client.
Many brokers and insurance agents call themselves “financial advisors” or “financial planners,” but they may not have a fiduciary duty and in fact may not be required to put your interests first. They represent themselves or their company. Rather than a legal responsibility to act in your best interest, they instead must only provide you with “suitable” financial products. This “suitability standard” is very broad and difficult to impose.
Fiduciary duty is stricter than the suitability standard. It’s not enough for them to just provide “suitable” recommendations. They must provide you with the best advice possible.
Fiduciary Duty vs. Suitability Standard
If you go to a stockbroker for investment advice, the broker may recommend that you invest in a particular fund (Fund A) even though there is another fund (Fund B) that may be a better choice. The suitability standard permits the broker to recommend an inferior investment fund because it gives them a higher commission (as long as it’s still a “suitable” investment).
On the other hand, fiduciary financial advisors are required to recommend you invest in Fund B since it’s your best option and they have a fiduciary duty to clients.
Because fiduciaries are held to such a high standard of care, much of the informed public makes an effort to seek the advice of fiduciary financial planners. Whenever possible, ask your advisors if they are fiduciaries and are required to act in your best interest.
Read my blog post “Fiduciary Duty vs. Suitability Standard” for another real-life comparison.