The Difference Between a Fiduciary and non-Fiduciary Advisor

Fiduciary vs. Non-Fiduciary Advisors: What's the Difference?

When it comes to managing your finances, choosing the right advisor is crucial. But did you know that not all financial advisors are the same? One key distinction lies in whether they're a fiduciary or non-fiduciary advisor. Let's break down what this means for you and your money.

What is a Fiduciary Advisor?

Imagine having a financial coach in your corner, someone who's legally and ethically bound to put your interests first. That's essentially what a fiduciary advisor is. These financial professionals are required by law to act in your best interest at all times. Here's what that means:

• They must prioritize your financial well-being over their own profits.
• They're required to be transparent about any potential conflicts of interest.
• Their recommendations must be the best options for you, even if it means less money in their pocket.

Fiduciary advisors typically work on a fee-only or fee-based model which can mean a higher cost, and are often registered as Registered Investment Advisors (RIAs) with the SEC or state regulators. Many hold certifications like the CERTIFIED FINANCIAL PLANNER® mark that also requires the advisor to operate as a fiduciary.

What about Non-Fiduciary Advisors?

On the other hand, non-fiduciary advisors operate under a different set of rules. They're still held to a standard, called a "suitability" standard. Here is what that means:

• They must provide recommendations that are suitable for you, but not necessarily the best option.
• They can recommend products that earn them higher commissions, even if there are less expensive alternatives available.
• They're not required to disclose all potential conflicts of interest.

Non-fiduciary advisors often work on commission-based models and may be affiliated with broker-dealers or insurance companies.  They may also hold certifications which can provide added confidence in their abilities and standards.

Why Does This Matter to You?

The difference between fiduciary and non-fiduciary advisors can have a significant impact on your financial health. Here are the key distinctions:

1. Legal Obligation: Fiduciaries are legally bound to put your interests first. Non-fiduciaries aren't.
2. Compensation Structure: Fiduciaries typically charge flat fees or a percentage of assets managed. Non-fiduciaries may earn commissions on product sales.
3. Disclosure Requirements: Fiduciaries must be transparent about all potential conflicts of interest. Non-fiduciaries have less stringent disclosure requirements.
4. Investment Recommendations: Fiduciaries must recommend the best options for you, even if it means less profit for them. Non-fiduciaries can recommend suitable but not necessarily optimal products.

Making the Correct Choice

So, which type of advisor should you choose?  When selecting an advisor, don't be afraid to ask questions. Feel free to inquire about their fiduciary status and how they're compensated. There are great fiduciary and non-fiduciary advisors out there.  While fiduciary advisors are often considered the gold standard for financial advice, the choice ultimately depends on your individual needs, cost considerations, and comfort level.

In the end, simply understanding the difference between fiduciary and non-fiduciary advisors helps to empower you to make an informed decision about who manages your money.