If you’ve been on the hunt for a financial professional, you may have encountered a plethora of options to choose from. Professionals with a variety of titles may be vying for your business, thus making your decision confusing and difficult. Should you go with a financial advisor? A fiduciary? A fiduciary financial advisor? We’re here to explain that a financial advisor is not always a fiduciary, and vice versa. That’s why it’s important to know the differences between a fiduciary vs. financial advisor so you know to pick the right one for you. This guide will break down these two roles, when they overlap, and other useful information. By the end, you should have a better understanding of which type of financial professional to go with, based on your personal circumstances.
What Does a Fiduciary Do?
A fiduciary is an entity or individual who has been tasked with carrying out responsibilities on behalf of a client.
The fiduciary role is legally-bound, meaning that any breach of the terms of the contract can lead to legal and financial consequences. This is because the client is placing a high level of trust into the fiduciary in respect to important, private, and sensitive matters.
Here are some expectations for a professional carrying a fiduciary role:
Make decisions in the client’s best interest
Maximize the client’s financial benefit whenever possible
Perform assigned duties and tasks to the fullest
Avoid any conflicts of interest.
Find the expanded definition of a fiduciary here.
Types of Fiduciary Advisors
There are several types of fiduciary advisors, including financial advisors. Here are some examples of different types of fiduciaries:
Principal or Agent of a company
You may notice that each of these roles fit the fiduciary definition above. Their duty is to carry out tasks on behalf of their client, in that client’s best interest. However, the list of responsibilities vary greatly depending on the fiduciary-client relationship. For instance, the fiduciary duties of an attorney would differ from the duties of a guardian.
The type of fiduciary in this guide is financial advisors in particular. Note that a financial advisor can also be a fiduciary, but not always. There are types of financial advisors that are not fiduciaries, so it is important to know the difference.
Here are the different types of fiduciary financial advisors (financial advisors that are also fiduciaries):
Discretionary Fiduciary Investment Advisor: When a fiduciary financial advisor is granted discretionary control over client accounts, they are called discretionary investment advisors. This means that they execute investment trades as they deem fit in order to maximize their client’s financial benefit. They are registered with the U.S. Securities and Exchange Commission (SEC) and state regulators, and collect management fees. If you would like to hand off your investment accounts to someone who knows what they’re doing, and are willing to put complete trust in them, then a discretionary investment advisor may be the way to go.
Non-Discretionary Fiduciary Financial Advisor: As you may guess, a discretionary fiduciary financial advisor is similar to a discretionary investment advisor, save for one key difference. They must gain their client’s approval before executing any investment decisions on their behalf. These advisors are also registered with the SEC and state regulators, meaning that they are held to a fiduciary standard.
Retirement Plan Fiduciary Advisor: Let’s say that you have a 401(k) at work. In this case, your employer plays a fiduciary role to your retirement plan. This is standard, so much so that you may have never stopped to question how much you can trust your employer’s retirement investment vehicles. Employees can have peace of mind knowing that both your employer and your employer’s retirement plan advisors are also fiduciaries. These advisors will assist employees in selecting their individual 401(k) plan options, and they will also advise the employer on plan options and assets at the institutional level.
What Does a Financial Advisor Do?
A financial advisor is a professional who will partner with you to maximize your financial health. For instance, if you just had a child that you’d like to send to college in 16 years, your financial advisor could help you calculate how much you’d need to save, plus devise a plan on how to save that amount in the most beneficial way possible.
Other topics could include tax planning, estate planning, retirement savings, and general investing. You could even work with a financial advisor to help guide you on how to get out of debt as quickly and as diligently as possible.
Further, once you’ve worked with a financial advisor to devise a plan for your financial health, they can also monitor your progress on your behalf. If you happen to have a fiduciary financial advisor, they may even execute investments and trades for you, to help you better meet your goals.
The educational background of a financial advisor will vary based on their specific role and job title. It’s helpful to find out which type of certifications and licenses your advisor has to identify how much experience they have.
Financial advisors make their money one of two common models: the commission-based model or the fee-based model. An advisor who makes commission may not bill a client. Instead, they make commission off of financial products that they’ve sold to the client. Alternatively, a client may charge an hourly or percentage fee. Some advisors may earn both commission and fees.
Types of Financial Advisors
According to CNN Money, there are over 100 financial designations within the world of financial advising. These different titles come. from various financial organizations, certifications, and licensing programs. However, there are a few key types of financial advisors that are the most common that are worth becoming familiar with. Here they are below:
Investment advisors: An investment advisor is a professional or company that is registered through the SEC and is authorized to provide official investment advice to clients.
Brokers: Members of the SEC and FINRA, brokers and broker-deals are authorized to buy and sell stocks, bonds, mutual funds, and other securities. The types of products they can sell depends on what licenses they hold, which we will touch on shortly.
Certified financial planners (CFP): CFPs are a class of financial advisors who have met rigorous training standards and have passed an official CFP Board certification exam. They have stringent ethical standards. CFPs may or may not double as investment advisors. They also may or may not have a fiduciary duty to clients.
Financial consultant: Almost anyone can position themselves as a financial consultant, as long as they have had experience and training in finance or banking. However, you may want to opt for a consultant who holds the ChFC (chartered financial consultant) designation. These consultants in particular have gone through rigorous training and have a fiduciary duty.
Financial coach: Similarly, anyone can market themselves as a financial coach. This may be someone who has a passion for personal finance, and wants to coach clients on more elementary topics such as how to save money, reduce spending, and reduce debt.
Portfolio managers: Whether they call themselves a portfolio manager, asset manager, or investment manager, these professionals manage investment portfolios on behalf of clients. To be safe, be sure that your portfolio manager is registered as an investment advisor.
Wealth advisors: Wealth managers often work with wealthy clients by offering investment advice and other financial planning services. Such an advisor may also assist and advise clients on activities such as estate planning, taxes, and charitable giving. Their objective is to increase their client’s wealth even more.
Robo-advisor: If you are looking for a more affordable, technology-based solution, then a robo-advisor may be a great choice for you. These are automated investment services that use algorithms to create investment portfolios on your behalf. You would typically answer a short questionnaire with your investment goals and timeline. Your portfolio is generated automatically based on your answers.
What’s the Difference Between a Fiduciary and a Financial Advisor?
The key difference between a fiduciary and a financial advisor is the level of ethical standards that they are held to when working with clients. This is not to say that a financial advisor does not have any ethical standards. To the contrary, most financial advisors hold themselves to best business practices.
However, many types of financial advisors make a living by earning commission. If their incentive lies with selling financial products to clients, then their financial best interest does not lie with the client. This means that, by nature, they cannot be a fiduciary.
In contrast, fiduciary advisors cannot earn commission. Instead, they charge flat hourly rates or percentage fees, and are relatively more affordable than non-fiduciary advisors. Because of their payment structure, their incentive lies with the client and their financial success. Fiduciary advisors are met with stringent licensing or certification standards overseen by entities such as the SEC and state regulators to ensure that they are adhering to a high ethical standard.
Not sure how to identify a fiduciary vs, financial advisor? Look for these different classifications:
Certified Financial Planner (CFP)
Series 7 License
Series 65 or 66 Licenses
Membership in Trade Associations
Certified Financial Planner (CFP)
Explained earlier, a Certified Financial Planner is a type of financial advisor that has undergone training and examination. According to the CFP Board, professionals must hold a bachelor’s degree or hire, must have completed approved coursework that takes roughly 12 to 18 months, and must have passed the CFP licensing exam.
A CFP may or may not be held to a fiduciary standard. Modera Wealth recommends searching the SEC Advisor and National Association of Personal Financial Advisors databases to identify whether or not a CFP is a fiduciary. A great clue is if an advisor is fee-based and is federally registered as an investment advisor. Any advisor who meets these two classifications are fiduciaries.
Any financial advisor registered with the U.S. Securities and Exchange Commission (SEC) or a state regulator is required to act as a fiduciary in some capacity. The SEC website provides web links to government resources and registries to confirm the registration status of various financial titles, including broker-dealers and investment advisors. It appears as though the onus is on the client to verify their financial advisor’s registration and title.
Series 7 License
If you see that your financial advisor holds a FINRA Series 7 license, know that they are not required to act as a fiduciary. They passed the General Securities Representative Qualification Examination (GS) administered by the Financial Industry Regulatory Authority (FINRA). This exam determines the eligibility of an entry-level professional to serve the role of a general securities representative.
FINRA describes a Series 7 professional’s major job functions. They assist with the firm’s business, open accounts, and provide clients with information and advice. They do not make discretionary investment decisions on a client’s behalf.
Series 65 or 66 Licenses
Professionals holding a Series 65 or 66 license from FINRA are more likely to be held to a fiduciary standard, at least in certain scenarios. The Series 65 license authorizes professionals to give clients investment advice and analysis. The Series 66 license is essentially a “next step;” financial professionals must carry both the Series 7 and Series 66 licenses before they can register with their state. In other words, a professional who holds both licenses is also most likely a fiduciary.
Membership in Trade Associations
Last but not least, membership in certain financial trade associations can indicate whether or not someone is a fiduciary. For instance, if your financial advisor is a member of the Investment Advisors Association (IAA), chances are, they act as a fiduciary in at least some of their roles.
When to Use a Fiduciary vs. When to Use a Financial Advisor?
Now you may be wondering, when should I use a fiduciary vs. financial advisor? It’s recommended that you use a fiduciary financial advisor in most scenarios.
Not only are they usually more affordable, they are legally and federally held to high ethical standards. Their role, by nature, is designed to serve your best interest and maximize your financial benefit and not their own. This is in contrast to non-fiduciary advisors who earn commission and, to put it bluntly, are incentivized to focus on their own bottom line over yours.
By working with a fiduciary, you can have peace of mind that the advice you’re receiving is unbiased. Further, you can trust a fiduciary to make and execute investment decisions on your behalf.
However, this is not to say that financial advisors are not trustworthy. However, they are not required to meet the same state and federal ethical standards. It could be perfectly appropriate for you to work with a financial advisor when you need basic financial planning education, or are opting to use a robo-advisor for basic investing.
Ultimately, it is up to you to decide what you need from your financial advisor, what responsibilities you expect them to have, and whether or not you need them to be a fiduciary.
Do You Need a Fiduciary or Financial Advisor to Create Your Estate Plan?
Fiduciary vs. financial advisor: which should you use in the context of planning your Estate Plan? It turns out that fiduciaries play a key role in estate planning. Not only can a fiduciary help you plan your estate, you’ll often need to name fiduciaries to carry out your Estate Plan. Allow us to explain.
First and foremost, you may work with an attorney, financial advisor, or legally-backed platform to establish your Estate Plan. These entities should certainly provide you with guidance and advice that serve your best interest, and thus fall into the client-fiduciary dynamic. Further, individuals often name roles such as Guardian, Trustee, Executor, or even Conservator as a part of their Estate Plan. You need to be able to place your trust in these individuals, such as they will carry out your wishes even after you’re gone. Thus, these roles fall into the fiduciary-beneficiary dynamic as well.
Fiduciaries are legally liable to hold themselves to the highest ethical standard, and always act in the best interest of their client or beneficiary. If they don’t, or fail to carry out their duties appropriately, they could face significant legal and financial consequences. At the end of the day, it provides greater peace of mind knowing that you’re working with a fiduciary. At the end of the day, it provides greater peace of mind knowing that you’re working with a fiduciary. Knowing this, you’ll want to be cautious when naming fiduciaries in your Estate Plan.
Has this guide compelled you to rethink your Estate Planning fiduciaries? Don’t worry! Trust & Will makes it easy for you to establish and update your estate planning documents. They are not always meant to be set in stone. You will change, and the people around you will change over the course of a lifetime. This means that your Estate Plan might change as well! It will save you a lot of time and many headaches by working with a platform like ours to keep your documents streamlined and organized. Get started today.
Is there a question here we didn’t answer? Reach out to us today or chat with a live member support representative!