If you’ve spent time working with, or learning about, the financial services industry, you’ve likely heard the term fiduciary. In recent years, an increasing number of asset managers and advisors have used it as more of a marketing buzzword than an actual standard of client care.

Unfortunately, much like the term “financial advisor,” the use of “fiduciary” isn’t closely regulated. Even worse — and more confusing for clients — the meaning of fiduciary often means different things to different firms and advisors. 

If you’re working with a financial planner or specifically looking for a fiduciary financial advisor, we believe it’s important to know exactly what it means to be a true fiduciary and how firms define it. In this article, we’ll cover the importance of working with a fiduciary financial advisor, what it actually means, and how you can verify an advisor’s fiduciary duty.

What is a fiduciary?

At its core, to be a fiduciary means to act on behalf of another person or entity and to always put their best interests first. In a fiduciary relationship, someone (the beneficiary) puts their trust and confidence in someone else (the trustee or fiduciary). When fulfilling a true fiduciary duty, the fiduciary agent puts the beneficiary’s interests ahead of their own and all others.

Some examples of fiduciary relationships include:

  • A doctor and patient
  • Real estate agents and their clients
  • A principal and their power of attorney
  • An executor of a will
  • A lawyer and their client
  • A corporation’s board and its shareholders

In these relationships, you can see how important trust is. And when someone entrusts their well-being to another, it’s reasonable for them to expect that person to act in their best interest.

Are financial advisors fiduciaries?

For financial advisors, to be a fiduciary means to always put the client first. As you can imagine, personal finance affects almost every area of our lives. Many people look to financial advisors to help them achieve financial peace of mind and move them closer to their goals. In this important relationship, clients put a lot of trust in their advisors as they share deeply personal information and rely on the advisor to use that information to promote their best interests. 

Because of the important relationship between a person and their financial advisor, you might think all financial advisors would naturally want to put their clients first or — at the very least — be legally required to do so. You’re not alone. According to a joint study by Rand Corp. and the SEC, as well as data from Personal Capital’s financial trust report, more than 40% of Americans mistakenly believe all advisors — including brokers — are required by law to always act in their clients’ best interest. 

Unfortunately, that’s not the case. There’s little in the way of regulation when it comes to who calls themselves a financial advisor. This leads to mounting confusion and lack of clarity for consumers. It also leads to a lot of differentiation between “advisors” when it comes to their fiduciary standard.

This variation is identified most clearly through an advisor's compensation model. That is how an advisor gets paid — or, put more pointedly, who pays the advisor. There are three primary compensation models for financial advisors: fee-only, commission-based, and fee-based. Which compensation model an advisor chooses usually impacts which regulations — including fiduciary standards — apply to them. And, ultimately, decides what they offer to clients: selling products or implementing holistic and objective financial advice.

Fee-only financial advisors

Fee-only financial advisors are paid directly and solely by their clients. They do not accept commissions or third-party kickbacks from large wirehouse brokerages or financial product wholesalers. Instead, they are paid by clients for their objective advice and ongoing management services. Some fee-only advisors base their fee on the value of a client’s assets under their management. Others may use a flat-fee or hourly rate. In either case, clients are their only source of revenue. Fee-only financial planning firms are commonly Registered Investment Advisors (RIAs), which are held to a legal fiduciary standard of care.

Elwood & Goetz is an independent RIA, and we have a 100% fee-only fee schedule based on the value of a client’s assets under our management. We believe this is the best way and right way to serve clients and advance our profession. Our fee structure provides great transparency and ensures our financial success is directly tied to our clients’ financial success. We do better when our clients do better.

Commission-based financial advisors

At the other end of the spectrum, there are commission-based brokers and agents who are paid by selling products, like insurance policies, annuities, and specific investment funds. While the client ultimately bears the cost of these commissions, commission-based representatives are not paid directly by the client. Instead, they are often paid by large wirehouse brokerage firms, insurance companies, or wholesalers.

This can lead to a lot of questions for clients. Commissions naturally open the door to conflicts of interest, as brokers may recommend certain investments, products, or trading activities that earn them the highest commission check. Oftentimes, they are incentivized to push proprietary  products to clients — even when there are comparable, more affordable options available.

Because of these conflicts of interest, brokers are limited in the advice and recommendations they can provide to their clients. Where an independent fiduciary advisor has the ability to recommend the most optimal solution for their clients, commission-based brokers are limited to the products or investments that have agreed to pay them a commission in exchange for their sale.

Given this limitation, commission-based brokers— many of which still call themselves financial advisors — are regulated differently than fee-only RIAs and are not held to the same legal fiduciary standard. This makes sense: How can a commission-based broker truly put their clients’ best interests first if they only provide and implement recommendations tied to a limited number of products (inherently excluding hundreds of other — perhaps better — options)? Therein lies a key difference between fiduciaries and non-fiduciaries: a fiduciary financial advisor is focused on providing unbiased advice to support your overall financial well-being, while non-fiduciary brokers are primarily driven by selling you specific products that are suitable for defined financial needs.

Fee-based financial advisors

Somewhere between fee-only and commission-based, there are fee-based advisors. Commonly confused with fee-only advisors, fee-based advisors use a hybrid compensation model. During some interactions, they are paid directly by their client for the advice they provide. During other interactions with the same client, they are paid commission for selling products to their clients. In other words, they receive both fees and commissions. 

This “changing of hats” can be confusing for clients. Because RIAs and broker-dealers are regulated by different standards, a fee-based advisor wears their fiduciary hat some of the time and their broker hat at others.

Consider this scenario: A fee-based advisor operating in their fiduciary role for a client’s investment accounts recommends to a client that they obtain a life insurance policy. The client agrees to follow the recommendation. Soon after, the fee-based advisor shifts gears and begins talking about and recommending only proprietary life insurance products their firm sells as a broker — while excluding other life insurance products (even those that might be better for the client). In this example, it’s important that the client understand which “hat” the advisor is wearing and when. But oftentimes, they either don’t know or don't fully understand the difference.

Responsibilities of a fiduciary financial advisor

So, what exactly does it mean for a fiduciary to put their clients first? There are specific duties and responsibilities a fiduciary financial advisor must uphold. Specifically, duty of loyalty and duty of care.

Fiduciary duty of loyalty

Duty of loyalty means that the financial advisor will be most loyal to the client’s interests at all times. They can never have undisclosed conflicts of interest, must do all that they can to avoid conflicts of interest in the first place, and they must always put the client first without regard to other financial interests — even their own.

Fiduciary duty of care

Duty of care means that the financial advisor will be diligent in fulfilling their responsibilities and obligations to their client. They will closely analyze and review all relevant information in reference to the client’s financial well-being and evaluate all opportunities before making recommendations.

Regulatory distinctions: Fiduciary Standard vs. Regulation Best Interest

So, if an advisor (like a broker) isn’t held to a fiduciary standard, including a duty of loyalty and duty of care, what are the regulatory expectations? 

Broker-dealers and their representatives are not held to the fiduciary standard. Instead, they are held to a more loosely defined “best interest” regulation, known as Regulation Best Interest, or Reg BI. When making investment recommendations to their clients, broker-dealers are required to recommend what they believe to be in the client’s best interest; however, the advice they provide is limited in that it must be solely incidental — that is directly connected or related — to the product they’re selling.

These limits on their recommendations and advice do make a big difference for clients. Research conducted by the Financial Planning Association — co-authored by Elwood & Goetz investment advisers Drs. Joe Goetz and Swarn Chatterjee, along with Dr. Brenda Cude — shows that this regulatory distinction does have a direct impact on the advice clients receive. In a survey of nearly 400 investment professionals, the study found:

  • Close to one-third of brokers expected that their advice might be different or were unsure if their advice might be different if they operated under a fiduciary standard (instead of Reg BI).
  • Nearly half said they would have a greater range of solutions to recommend to clients if they operated under a fiduciary standard.
  • More than half said they would likely spend more time with their clients if they operated under a fiduciary standard.

Unlike these brokers, RIAs are held to a fiduciary standard at all times. That means they must always put the clients first and eliminate conflicts of interest whenever possible. 

For RIA advisors, the legal fiduciary standard applies to the entire advisor-client relationship (at all times). For brokers, the best-interest standard is more limited and only applies when they are providing a specific recommendation (for which, in many cases, they will earn a commission). Additionally, under the fiduciary standard, advisors must do their best to avoid or eliminate conflicts of interest. Under loosely defined best interest regulations, brokers must only disclose these conflicts, which is often done as part of the advisor's written agreements.

Why does it matter if a financial advisor is a fiduciary?

When working with or looking for a financial advisor, we think it’s important for consumers to have as much information as possible. There are so many options when it comes to financial products, institutions, and funds. Many of them are made even more complicated by lengthy, technical disclosures. True financial advisors provide objective advice to help their clients sort through the noise, options, and opportunities that can impact their financial well-being. After all, unbiased and effective advice is one of the main reasons people hire financial advisors in the first place.

Photo of four financial planners meeting together at a conference room table

The primary difference between fiduciaries and commission- or fee-based brokers — and why we’d argue it does really matter for clients — is that one focuses on providing and implementing holistic financial advice that always puts clients first (a fiduciary) while the other focuses on selling products (a non-fiduciary broker).

This isn’t to say that all commission-based brokers are inherently misleading. The financial services industry needs people from whom clients can purchase financial products (like insurance). But it’s important to note that these relationships are driven by sales and are not intended (or even legally permitted) to include holistic financial advice. This leaves a lot of the responsibility on the client to do their due diligence and determine what’s truly best for them and their financial well-being.

We believe it is important for you to know who your financial advisor has loyalties to and where their limitations are. Are they most loyal to you and your best interest? Or are they most loyal to the corporations writing their commission checks? It’s reasonable for a client to be skeptical of their advisor’s objectivity if they aren’t legally required to act as a fiduciary at all times. And if holistic financial advice is what you’re truly looking for, you shouldn’t have to question when or if your advisor is working in your best interest.

If it’s important for you to have ongoing advice that covers all areas of your financial life, then you will benefit greatly from working with a fiduciary financial planner. Instead of working with someone who is a distributor of a limited number of products (like brokers), you’ll be working with someone who has access to and advises on all financial solutions and scenarios that impact your situation. Although it may not be explicit or obvious, relying on a broker for your overall financial well-being will likely limit your success. You will find more assurance knowing that your advisor will share objective, unbiased, and comprehensive advice that always puts your interests first.

How to verify if a financial advisor is a fiduciary

If you’ve decided working with a fiduciary financial advisor is important to you, you may be wondering about the best way to confirm an advisor is actually a legal fiduciary. Here’s how:

  • Ask the advisor — and get their answer in writing. Any advisor who is trustworthy and transparent should be able to tell you directly if they are a legal fiduciary. You can take it one step further by asking them to provide a signed fiduciary oath committing to always putting your best interests first (here is ours). Be really clear: are they legally obligated to put you first all of the time, or just some of the time?
  • Review the advisor’s Form ADV. Registered Investment Advisors (RIAs) are required to file their Form ADV disclosure with the U.S. Securities and Exchange Commission. Think of a firm’s Form ADV as their resume, fact sheet, and background check. These disclosures are available as public records on the SEC’s website. (Here’s E&G’s Form ADV, for reference.)

It goes without saying, but if a financial advisor dodges your questions about their fiduciary standard, services, or compensation model — or if they’re unwilling to provide signed verification — it’s likely that they aren’t a legal fiduciary required to always act in your best interest.

Our fiduciary duty and oath

At Elwood & Goetz, we believe in transparency. As such, we publish our entire fee schedule, list of services, and fiduciary oath and code of ethics on our website. We think that if a business is doing things the right way, they’ll be proud to share this information with their employees, clients, and prospective clients.

As fiduciary financial advisors, we are committed to the following ethical and legal obligations for all our clients:

  • We will always put your best interests first.
  • We will act in good faith, with prudence, transparency, and candor.
  • We will never accept any compensation, commissions, kickbacks, referral fees, or other remuneration associated with the purchase or sale of a financial product.
  • We will do our very best to avoid conflicts of interest that may impact our clients or reasonably compromise the impartiality of our advisory team; and when such conflicts are unavoidable, we will proactively provide written disclosure.

To put it in the most direct and straightforward way: we work only for our clients. Not third-party shareholders, large wirehouse brokerages, or product wholesalers. Deep to our core, we believe this is the best way, the right way, and for us, it’s the only way.

We strongly believe that financial planning is first and foremost a helping profession. Our fee structure, independence, and fiduciary oath help give our clients peace of mind — knowing we’re solely devoted to them.

Conclusion: What it means to work with a fiduciary financial advisor

A fiduciary financial advisor will always put your interests first. They won’t put their interests — like the size of their commission check — or the interests of external parties ahead of yours. 

It’s important to know that not all financial advisors are fiduciaries. In fact, although many advisors use the term fiduciary in their marketing, only 2% of financial planning firms are legally required to always make optimal recommendations for their clients (Wall Street Journal). 

Financial planning is one of the most deeply personal and vulnerable facets of a person’s life. When opening up to an advisor, you should know whether that advisor will use those details to inform recommendations that put your interests first — or to try and sell you a product. 

To illustrate the importance of an advisor’s fiduciary duty, here’s a recap of the differences between fiduciaries and non-fiduciaries:

  • Advice vs. sales: When working with a fiduciary financial advisor, you’re paying for unbiased advice that puts your financial well-being first. Fiduciaries assess your complete financial picture and make recommendations that are in your best interest. Non-fiduciaries, on the other hand, sell and distribute products. They will help determine which of the products they carry will be most suitable for you, and then they will help to facilitate the transaction.
  • Holistic vs. limited: Fiduciary financial advisors are required to always consider your best interest when making decisions or recommendations related to any and all areas of your financial plan. As a result, fiduciaries are able to offer comprehensive advice. By regulatory standards, brokers are not subject to a fiduciary standard and are much more limited in the advice they can provide. Specifically, they provide advice that’s solely incidental to a product they’re recommending and selling to you. Albeit, that product must be suitable for you and, relative to the other products they could recommend, serve your best interest.
  • Relational vs. transactional: In many ways, working with a fiduciary means building an ongoing, long-term relationship. True to its definition, that means you’re entrusting a financial advisor to provide recommendations for all areas of your financial life. Because of the points we’ve outlined above, working with a non-fiduciary can feel more transactional. That isn’t to say you will not engage with a broker-dealer multiple times, but they wouldn't be able to provide ongoing advice for all areas of your financial life.
  • Conflicts of interest: Fiduciary financial advisors are expected to avoid and eliminate conflicts of interest. And based on their compensation model (zero commissions or kickbacks), it’s unlikely conflicts of interest would exist in the first place. Non-fiduciary brokers can and will have conflicts of interest. From a regulatory standpoint, they are only required to state these conflicts in disclosures, which are oftentimes delivered through pages of legalese that clients may or may not read or fully understand.

We want to reiterate that we do not perceive all broker-dealers, brokers, or insurance agents as fundamentally bad actors who intentionally mislead clients. Quite the opposite, we are steadfast in our belief that there’s a place and a need for broker-dealers in the financial services industry. In fact, because we don’t sell any financial products, we regularly refer clients to brokers when recommending things like life insurance policies.

That said, we do not agree that RIAs and brokers should be positioned similarly as financial advisors. From regulatory standards to compensation models, the distinctions are quite stark. We believe there should be more clarity and intentionality when it comes to highlighting those differences. 

There are fundamental differences between RIAs as trusted advisors and brokers as salespeople. To position broker-dealers and their representatives as financial advisors in the same way as RIAs creates unnecessary complexity that can be misleading for consumers. Instead, we believe the two should be compared much more clearly: a fiduciary financial advisor delivers optimal financial advice, and a broker or agent is a salesperson who sells financial products. By highlighting this distinction proactively and transparently, consumers are provided an opportunity to more clearly understand the key differences and make an informed choice about which best serves their needs.

In a competitive marketing landscape, the word fiduciary is used more and more often to try and quickly gain credibility and trust. The term has been thrown around so loosely in marketing, its true meaning has been diluted — leading to greater confusion and lack of clarity for consumers. Because of this, our advice is to focus less on the use of the words “fiduciary” and “advisors” and instead look more closely at a person’s committed actions. The real distinction is that true fiduciary financial advisors will provide holistic advice and recommend only services and products that always puts clients first.

If you believe you could benefit from working with a fiduciary financial advisor, we’re here to help. You can book a no-cost discovery call to learn more about our services, our advisory team, and our fiduciary commitment.