Fiduciary. It sounds official, doesn’t it? Like those 19th century bankers in their three-piece suits and bowler hats. In a way, that’s not far off—minus the hats.

　　In general, a fiduciary is a person or organization who acts on behalf of others. A fiduciary can be a professional like an attorney, an accountant, or, very commonly, a financial advisor. A fiduciary is someone who provides advice or service that is 100% geared to what is best for the client.

　　The National Association of Financial Advisors (NAPFA) is the largest professional organization of fee-only financial advisors in the U.S. Here is NAPFA’s definition:

　　A fiduciary is a professional entrusted to manage assets or wealth while putting the client’s best interests first at all times. Financial advisors who follow a fiduciary standard must disclose any conflict, or potential conflict, to their clients before and during the advisory engagement. Fiduciaries will also adopt a code of ethics and fully disclose how they are compensated.

　　When someone provides a service to you—perhaps a broker, a car salesperson, or a real estate agent—they will posture themselves as being “on your side.” But if they’re a fiduciary, it’s like an extra stamp of reassurance.

　　What are conflicts of interest?A conflict of interest means someone has to choose between two separate interests or goals. In the case of a financial advisor, a common conflict of interest can arise when they have to choose between providing the best advice (recommending a financial product that is in the best interest of their client) versus recommending an action that will result in higher compensation.

　　For an advisor who has a fiduciary relationship with their clients, there is no such conflict. They exclusively act in the best interests of their clients in terms of all advice provided.

　　The Investment Advisers Act of 1940The Investment Advisers Act of 1940 established the role of the financial advisor, provided the initial criteria, and outlined the duties performed by financial advisors:

　　The act mandated a duty of loyalty and care toward clients that includes putting the client’s interests first.The act defined the type of care that advisors must take when executing trades for their clients. For example, they cannot engage in front-running, which is when an advisor buys a security for their own account before executing a trade for their client.It also prohibited advisors from making excessive trades on behalf of clients in order to generate more commissions for their own firm, a process known as churning.Best interest standard (Reg BI)The Securities and Exchange Commission (SEC) enacted the Regulation Best Interest standard in 2019. It replaced the suitability standard for broker-dealers, which mandated that they act in the best interests of their clients when suggesting investment products and delivering other types of advice.

　　The suitability standard has not been eliminated, but Reg BI places a higher standard of care on broker-dealers in making recommendations to their clients. Reg BI applies to:

　　Investment recommendations Account rollovers to a new account or custodian Retirement plan account distributions Recommendations regarding opening particular account typesAdditionally, Reg BI requires:

　　That broker-dealers provide a level of disclosure to clients A duty of care when making client investment recommendations The identification of potential conflicts of interest That broker-dealers make an effort to resolve any conflicts of interestUnder Reg BI, your broker is required to give you Form CRS (a customer relationship summary), which explains in detail the services that your broker offers and the types of relationships they maintain with clients.

　　How do I know if my advisor is a fiduciary?Many financial advisors who act as fiduciaries will say so in writing up front. Otherwise, the best way to find out is to ask them directly if they act in a fiduciary capacity with their clients. If the answer is yes, you might ask them to put this in writing. If they won’t do that, it should raise a red flag.

　　Do you have any conflicts of interest that could influence the advice you provide? If so, what are those conflicts?Are all client financial recommendations made based only on what is best for your clients?How are you compensated for working with clients like me? Do you receive compensation from any of the financial or investment products that you recommend? (If the answer is yes, this may be a conflict of interest.)Financial advisors who have earned the Certified Financial Planning (CFP) designation agree to a code of ethics specifying they must act as a fiduciary and in the best interests of their clients.

　　Advisors who are registered with the Securities and Exchange Commission (SEC) or at the state level are also bound by a fiduciary duty to their clients. Their registration can be verified on the FINRA BrokerCheck site.

　　Reg BI already imposes a duty of care on broker-dealers when working with clients, but the fiduciary standard unequivocally requires a registered financial advisor to act solely in the best interests of their clients, period.

　　The bottom lineDoes it matter if your advisor is a fiduciary? It’s an important consideration when choosing a financial advisor.

　　All else being equal, a fiduciary—someone who has a mandated higher level of care—is preferable. However, if you find an advisor you trust and with whom you’ve built a rapport, they might be right for you even if they don’t adhere to the fiduciary standard.

　　And even if your advisor is a fiduciary, you should ask questions about their investment philosophy, how they’re compensated, whether there are additional fees that come with their services, and more.

　　ReferencesSEC Laws and Rules—Investment Advisers Act of 1940 | sec.gov SEC Regulation Best Interest (Reg BI) | finra.org Fiduciary Responsibilities | dol.gov Fiduciary 101 | napfa.org