Skip to main content

What is a Fiduciary?

What is a Fiduciary?


In December 2023 and January 2024, we attended two tax and legal conferences. The attendees included financial advisors, CPAs, and attorneys. At each event, the speakers informed us that only about 7-10% of all financial advisors are true fiduciaries, and of these, a mere 1-2% are women. They emphasized the importance of correctly understanding what “fiduciary” means, as well as the difference between “captive” and “non-captive” advisors. It appeared that many of the CPAs and attorneys were unaware of these distinctions.

What is a Fiduciary Advisor?

The Investment Advisors Act of 1940 states that investment advisors have a fiduciary duty to act in their clients’ best interest.This fiduciary duty is regulated by the SEC and is characterized by two key applications (summarized):

Duty of Care: Advisors must thoroughly understand their clients’ financial objectives and circumstances, applying skill, diligence, and prudence to meet their needs and goals.

Duty of Loyalty: Advisors must avoid conflicts of interest and always prioritize their clients’ interests above their own.

How Can I Know if an Advisor is a Fiduciary?

One way is to simply ask the financial professional. Another method is to check the SEC website or look into the financial professional’s credentials; a certified financial planner (CFP) professional, for example, is obligated to act as a fiduciary advisor. All investment advisors registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator must act as fiduciaries.

On the other hand, broker-dealers, stockbrokers and insurance agents are only required to fulfill a suitability obligation. This means that while they must provide suitable recommendations to their clients, they don’t have to put their client’s interests before their own.

Only fiduciary financial advisors are required to place your best interest above theirs. Fiduciary financial advisors typically work for Registered Investment Advisors (RIAs). They can also be certified financial planners (CFPs), but you should always double-check before working with one.

The financial advisors who work for brokerage firms aren’t typically fiduciaries. These professionals instead are required to work under the legal bounds of the suitability standard. Under this standard, these advisors are required to give advice and product recommendations that are only suitable for you, meaning they may have high fees or offer the advisor a large commission.

What is an RIA?

An RIA is a Registered Investment Advisor, which is a company, or firm. They are legal fiduciaries, but broker-dealers and other types of money manager firms are not. Some financial advisors, such as certified financial planners, may also be fiduciaries. If your financial advisor doesn’t have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission than ones that would be the best fit for you, which could cost you more. Fiduciaries, on the other hand, must act in your best interest. That’s why it’s often considered better to work with a fiduciary rather than an advisor who is simply following the suitability standard.

Captive vs. Non-Captive Advisors

 Captive Advisors: A captive agent or advisor is only allowed to sell or use certain products or investments. Usually, agents or advisors work for a brokerage firm, a bank, or an insurance company. They are not able to sell or use products from other companies and/or are very limited to what if any other products they may use from another company

 Non-Captive Advisors: A non-captive agent or advisor is someone who could sell or use products or investments from a large array of other companies. They are not limited to what they can or cannot use as they are not tied to just one company or limited in nature.

Are Non-Fiduciary Advisors Bad?

Not necessarily. Advisors working at brokerage firms or captive insurance companies can offer good products and services. The key is understanding their limitations and potential conflicts of interest. It’s crucial for consumers to be aware of the type of advisor they are working with and what they can and cannot offer.

Making Informed Choices

Understanding these distinctions helps you make the best financial decisions for yourself. It’s your money and your life, so being informed about the type of advisor you’re working with is essential. Having transitioned from working at a brokerage firm and a hybrid insurance company to becoming a fiduciary at an RIA, we advocate for transparency and informed decision-making. Please let us know if you have any questions.

References:

  • https://money.usnews.com/investing/articles/what-is-a-fiduciary-financial-advisor   
  • https://www.nerdwallet.com/article/investing/fiduciary 
  • https://smartasset.com/financial-advisor/what-is-fiduciary-financial-advisor
  • https://www.forbes.com/advisor/financial-advisor/what-is-fiduciary-financial-advisor/        
  • https://smartasset.com/financial-advisor/what-is-fiduciary-financial-advisor

The commentary on this blog post reflects the personal opinions, viewpoints and analyses of the author, Veronica Aguilera, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third party

Comments

Post a Comment

Popular posts from this blog

Why Smooth and Steady Wins the Race: The Hidden Power of Protected Growth

Why Smooth and Steady Wins the Race: The Hidden Power of Protected Growth A question I hear often — especially from women who’ve saved diligently but feel uneasy about market risk:   👉 “How do I invest without losing everything if the market crashes?”     T hat’s where stories help. Meet Christine. She’s not a real client, but she represents so many women I speak with.   Christine’s Dilemma   - In 2000, Christine inherited $100,000.   - She wanted to honor her grandmother’s legacy by investing it wisely — not chasing returns, but finding security and peace of mind.   - Her advisor suggested the S&P 500. “Just let it ride,” he said.     But what Christine didn’t realize — and what many overlook — is how bumpy the ride can be … and how much taxes + volatility eat away at growth.     Let’s compare two paths Christine could have taken:   Path 1: The Market Ride — Growth with Bumps, Taxes, and Uncertainty   If Chris...
Post a Comment
Read more

Widows Beware: 5 Common Scams That Prey on Grief

Widows Beware: 5 Common Scams That Prey on Grief 5 Common Scams That Prey on Grief and How to Stay Protected I never imagined I’d be writing this as a widow myself. Losing my husband has been the most painful, disorienting experience of my life. The quiet moments are the hardest—his empty seat at the table, the silence where laughter used to be, his shoes where he left them at the front door. And yet, even in the midst of all this heartache, I’ve seen something that made me feel not just sad, but angry: the way scammers actively target women who are grieving. What many people don’t realize is that con artists  scan obituaries . They look for recent widows—like me, like many of my clients—and they use that information to strike when you’re vulnerable. They pretend to be funeral home staff, creditors, old friends, or even romantic interests. They know you’re in pain, and they exploit that. As someone who has worked with widows for years—and now, as someone walking that same road—I wa...
Post a Comment
Read more

The First 100 Days | A Gentle, Guided Path to Your Financial Transition

If you’ve ever switched your checking account from one bank to another, you know the drill:      1️⃣ Walk into the new bank or visit their website.      2️⃣ Open the account.      3️⃣ Write a check to yourself — or better still, create an electronic transfer that happens      overnight.      4️⃣ Done. If only moving your brokerage accounts worked like that! In reality, every account, every custodian — 401(k), 403(b), IRA, TSP — plays by its own rulebook. Some require “wet” signatures in blue ink. Others demand online authorizations. Some process transfers quickly, while others take the scenic route and seem to be waiting for a carrier pigeon to deliver your request. And if you’re a woman, chances are this is just one more task on an already overflowing to-do list. You’re managing careers, caregiving, households, relationships, and everything in between. No wonder moving your investments has been sitting on the...
Post a Comment
Read more