What A Financial Adviser Means By Fiduciary
Two advisers with similar titles can operate under materially different obligations to you.
The word fiduciary is used loosely in marketing and precisely in regulation. For someone choosing an adviser, the distinction determines what the adviser is required to do when their interest and yours diverge.
Two regimes
Investment advisers registered under the Advisers Act owe a fiduciary duty to clients — a duty of care and of loyalty, requiring them to act in the client's best interest and to disclose or avoid conflicts.
Broker-dealers making recommendations to retail customers operate under a different standard, requiring recommendations to be in the customer's best interest without imposing the same continuing fiduciary relationship.
The distinction is real, it is not a matter of ethics or diligence, and the same firm may operate in both capacities depending on the service.
How advisers are paid
Fee-only advisers are paid by clients — a percentage of assets, a flat fee, or hourly. Commission-based advisers are paid by product providers when clients buy products. Fee-based describes a mixture, and the similarity of the terms is not accidental.
None of these is disqualifying. What matters is that you know which applies, because it predicts where conflicts arise.
The questions to ask
Ask directly and expect a written answer: are you acting as a fiduciary in all of our dealings; how are you compensated, in full, including anything received from third parties; and do you receive additional compensation for recommending particular products.
An adviser who cannot answer these plainly in writing has answered them.
The public record
Registered advisers file a disclosure document setting out services, fees, conflicts and disciplinary history. Registration and disciplinary records for firms and individuals are publicly searchable through regulators' databases.
Checking takes a few minutes and is worth doing before a first meeting rather than after.
Credentials
Certifications vary enormously in rigour. Some require substantial examination, experience and continuing education under an enforceable ethical code; others require a weekend. Look up what any given set of letters actually required.
This is general information, not financial advice. Nothing here is a recommendation to buy or sell anything; speak to a licensed adviser about your own position.
