What is a Fiduciary?

Many people, when searching for a financial advisor, ask if we are fiduciaries. First, it’s helpful to understand what a fiduciary is. I’ll also explain why it matters for you when choosing a financial planner.

A fiduciary is a person or organization that is legally and ethically required to act in someone else’s best interests rather than their own.

A fiduciary has a duty of:

• Loyalty – putting the client’s interests first.
• Care – making informed and prudent decisions.
• Good faith – acting honestly and avoiding conflicts of interest.
• Disclosure – informing the client about important information and potential conflicts.

Common examples of fiduciary roles:

• Trustees when managing a trust for beneficiaries.
• Executors who are administering an estate for a deceased person.
• Guardians caring for a minor or incapacitated person.
• Corporate directors and officers who owe fiduciary duties to the company and its shareholders.
• Financial advisors who are held to a fiduciary standard and must make recommendations that are in their clients’ best interests.

There are many financial service providers who may call themselves “financial advisors,” but they are not bound by the fiduciary standard. Certified Financial Planners (CFP^® professionals) are legally and professionally bound by this standard.

The fiduciary standard for CFP^® professionals is enforced by the CFP Board through their strict Code of Ethics and Standards of Conduct. When a CFP^® professional is working with you, their fiduciary duty is broken down into three primary pillars:

• Duty of Loyalty: This requires the practictioner to put your interests ahead of their own or their firm’s interests. If any material conflicts of interest arise, they are legally and ethically obligated to disclose them, obtain your informed consent, and properly manage the situation. An example of this could be a client asking about taking money out of their brokerage account to pay off their mortgage. If the brokerage account covers a part of the advisor’s fee, the advisor might dissuade the client from using those funds. As a fiduciary, we would give advice that would be in the client’s best interest, not our own.
• Duty of Care: They must act with the same care, skill, prudence, and diligence that a prudent professional would use, taking into account your specific personal and financial circumstances. An example of this is thoroughly researching a client’s risk tolerance, age, and goals before recommending an investment, ensuring the choice is prudent and fits their specific situation rather than buying a trendy product.
• Duty to Follow Client Instructions: The CFP^® professional must comply with all of your lawful objectives, restrictions, and reasonable directions as agreed upon in your engagement. An example of this could be a client asking you to place a market trade which may not align with their investment goals. As a fiduciary, we are obligated to place the requested trade. We would also be obligated to ensure they understand why this may not align with their investment goals.

Fiduciary vs. Non-Fiduciary

Earlier I mentioned that other financial professionals do not need to follow the fiduciary standard. They are only required to follow the “suitability” standard. Under suitability, a recommendation only needs to be appropriate for the client; under a fiduciary standard, it must be made with the client’s best interests as the top priority.

An example of the “suitability” standard could be a broker (non-fiduciary) recommending a mutual fund with a 5.75% sales commission. The mutual fund “suits” the client because it matches the client’s growth goals and risk tolerance. The broker is recommending this fund because of the commission tied to it, instead of recommending a similar mutual fund with no sales commission which would also suit the client. The broker is choosing profit over best interest. The fiduciary must act in your best interest, not their own.

In simple terms: a fiduciary is someone you trust with important decisions and who is legally obligated to put your interests ahead of their own.

At Sound Stewardship, all our advisors are CFP^® professionals and all serve in a fiduciary role. Additionally, because we are a Fee-Only firm, we never receive commissions for any recommendations we provide.

If you’d like to talk to a financial planner about your situation, reach out to schedule a meeting with a Sound Stewardship Wealth Advisor today.

< Back to Insights