3 minute read

Why Fiduciary Duty Impacts Financial Advisors

While fiduciaries and financial advisors can be totally separate roles, there is oftentimes a link between them that must be understood. T&W explains.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

The main role of a financial advisor is supporting you in your financial health journey. Depending on your place in life, this could be a preliminary road toward achieving good financial health. At another point in your life,  it could be the pathway toward optimizing and enhancing your wealth. (One can hope!) Money is a sensitive and important matter. The outcomes we achieve based on our financial advisor’s guidance or decision-making can greatly impact an integral aspect of our wellbeing. Because of this, most financial advisors are held to something called fiduciary duty. 

We say “most” because, surprisingly, not all financial advisors are held to a fiduciary standard. We explain the reason for this in detail here. The focus of this article, however, is on financial advisors that are impacted by fiduciary duty. We explore what it means in the context of financial advising, and how having a fiduciary duty shapes the roles and responsibilities of a financial advisor.

What Is a Fiduciary?

A fiduciary is a named individual or entity that is held to a high ethical standard. They are carrying out an essential function in which they are entrusted with making decisions and executing duties on behalf of another. It is assumed that they will always act in the best interest of the entity which they serve, and will carry out tasks to the fullest. They will also be careful to avoid any conflicts of interest. We provide a full explanation of a fiduciary role in our “What is  Fiduciary” guide. 

What Are Fiduciary Duties?

Fiduciary duties can become applicable in a variety of scenarios. This guide will primarily focus on the financial advising profession. However, fiduciary duties can be applied to an attorney, as well as estate planning roles such as Trustees, Guardians, and Conservators. These are just a few examples. 

Based on what you’ve learned so far, can you think of anyone who may act as a fiduciary? (Hint: think of anyone who is always required to serve the best interests of another person, or a group of individuals. This is even if those interests come into direct conflict with their personal interests, incentives, or values.)

There are two key tenets of fiduciary duty: the duty of care and the duty of loyalty. Under the duty of care, fiduciaries are required to make informed decisions using critical analysis. They should always act in a way that enhances the financial benefit of their client or beneficiary, which requires a high degree of professionalism and ethical conduct. 

Second, fiduciaries must not have any conflicts of interest. For instance, an attorney should not take on a client if they are already signed with a client that is involved in the same case. In another example, someone planning their estate should be careful not to name an Executor or Trustee who may abuse their power. For more information, check out our discussion on how fiduciary duty plays an important role in estate planning.

Financial Advisors and Fiduciary Duty - How Are They Related?

All financial advisors have a duty to maximize the financial health of their clients; this includes making the best possible investment decisions, recommending the best possible advice tailored to the client, and selling affordable products that fit within their budget. 

Fiduciary financial advisors are typically those that are registered with the U.S. Securities and Exchange Commission (SEC) and additional state regulators. They have typically gone through rigorous studies and training, including training on ethics. Registered fiduciary advisors are often monitored by associations and governing bodies and are held to high ethical standards. There could be professional, legal, and financial consequences if they are ever found to have violated ethical codes of conduct.

However, not all financial advisors have a fiduciary duty. For instance, there are financial advisors who make a living off of commission. This means that the more financial products they sell to clients, in terms of price and volume, the more money they’ll make. Naturally, their incentive is to serve their own bottom line over their clients’. 

Choose the Right Fiduciary Financial Advisor for You

Financial advisors can be excellent at their jobs, regardless of whether they have a fiduciary duty or not. However, seeking out a fiduciary financial advisor can give you greater peace of mind. The scope of work is also an important consideration. For instance, perhaps you’re just looking for someone experienced in finance who can give you great advice for you to implement on your own. In this case, fiduciary duty doesn’t necessarily come into play. 

However, there may be a time when you want your financial advisor to make investment decisions for you, including trading and selling and building your portfolio on your behalf. In this case, you would certainly want them to be a fiduciary so you can rest assured that they are always acting in your best interest.

Determining whether or not a fiduciary is necessary doesn’t just apply to financial planning. As mentioned earlier, fiduciary duties also play a big role in Estate Planning. For instance, you would typically name your desired Executor when you write your Will. In addition, you would most certainly name a Trustee when setting up a Trust. Finally, if you have any dependent minor or adult children, you have the option of naming a Conservator or Guardian to look after your loved ones. If you think about it, these roles are critical. They require a significant amount of trust; they are meant to act and make decisions as you would have wished if something were to happen to you. Your Estate Plan fiduciaries can either be someone you know personally, or a professional. We highly recommend the read, “How to Choose a Professional Fiduciary for My Estate” for further tips and guidance. That way, you can feel more comfortable and equipped to name your fiduciaries for your Estate Plan. 

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