What Is a Fiduciary? ...And Why Does It Matter Who You Work With?

In Plain English: What Is a Fiduciary? ...And Why Does It Matter Who You Work With?

If you've spent any time researching financial advisors, you've probably come across the word "fiduciary." It's used often, but rarely explained in a way that makes clear why it actually matters for your financial life.

It matters more than most people realize.

Two different worlds

Not everyone who calls themselves a financial advisor is held to the same legal standard. In the United States, there are two primary categories of financial professionals, and they operate under fundamentally different rules.

A registered investment adviser (RIA) is bound by what's known as a fiduciary duty: a legal obligation rooted in the Investment Advisers Act of 1940. That duty has two components: a duty of care and a duty of loyalty.

The duty of care requires an advisor to provide advice that is genuinely in your best interest, based on your specific situation and goals. The duty of loyalty requires the advisor to put your interests ahead of their own, and to fully disclose any conflicts of interest that could influence their recommendations. Critically, this duty cannot be waived or contracted away. It exists by operation of law, simply because of the nature of the relationship.

A broker-dealer, by contrast, has traditionally operated under a different framework. For most of the industry's history, brokers were held to what's called a "suitability standard", meaning a recommendation only had to be reasonably suitable for a client, not necessarily the best option available. Two nearly identical funds might both be "suitable" for a client. If one paid the broker a higher commission, the suitability standard didn't require them to recommend the other one.

What changed...and what didn't

In 2020, the SEC adopted Regulation Best Interest (Reg BI), which raised the bar for broker-dealers beyond the old suitability standard. Broker-dealers are now required to act in the "best interest" of their retail customers at the time a recommendation is made, and to mitigate conflicts of interest more transparently.

This was a meaningful improvement. But it's worth understanding what Reg BI is and isn't. The SEC explicitly did not impose the fiduciary standard on broker-dealers under Reg BI. The requirement applies at the moment of a recommendation-- not on an ongoing basis. And questions remain in the industry about how "best interest" is defined and enforced in practice compared to the full fiduciary standard.

The fiduciary standard that applies to registered investment advisers is broader, continuous, and non-negotiable.

Why the distinction matters in practice

Here's the simplest way to think about it.

A broker is, in important ways, a salesperson. They may be a skilled and well-intentioned one--but their business model is built around transactions and, in many cases, compensation tied to the products they recommend. Their obligation is to the recommendation in the moment.

A fiduciary advisor is legally obligated to you: your goals, your circumstances, your long-term interests, on an ongoing basis. Their obligation doesn't end when a transaction is completed.

This difference shows up in real ways:

• How conflicts of interest are handled and disclosed

• Whether the investment options recommended are the best available for your situation, or simply acceptable ones

• Whether advice is driven by your financial plan or by what's available on a product shelf

• Whether the relationship is structured around ongoing guidance or individual transactions

How to find out which standard applies

The easiest way to know is to ask directly: "Are you a fiduciary? Are you required to act in my best interest at all times?" A fiduciary advisor should be able to answer that clearly and in writing.

You can also look up any financial professional using FINRA's BrokerCheck tool (finra.org/brokercheck) or the SEC's Investment Adviser Public Disclosure database (adviserinfo.sec.gov), both of which are free and publicly available.

Bringing it back to your plan

Working with a fiduciary doesn't guarantee investment success... no one can promise that. But it does mean the advice you receive is structured around your interests, not someone else's. For decisions as consequential as retirement planning, estate planning, and long-term wealth management, that foundation matters.

If you've ever wondered why we talk about our fiduciary obligation the way we do, this is why. It's not a credential or a marketing term. It's a legal commitment-- and one we take seriously.

Sources: U.S. Securities and Exchange Commission, Commission Interpretation Regarding Standard of Conduct for Investment Advisers (2019), federalregister.gov; Investment Advisers Act of 1940, Section 206; SEC, Regulation Best Interest (2020), sec.gov; FINRA BrokerCheck, finra.org/brokercheck; SEC Investment Adviser Public Disclosure, adviserinfo.sec.gov

Disclosure: This article is intended for educational purposes only and does not constitute legal or investment advice. Please consult with a qualified financial or legal professional regarding your specific situation.