A fiduciary is a person in a position of trust who obligates himself to always act in the best interests of those who trust him. For example, the trustee of a trust is considered a fiduciary and must always act in the best interests of the trusts beneficiaries. Fiduciaries are legally required to act in the best interests of those theyre serving, and they can never put their own interests first.

Why Does It Matter?

So why should you care what (or who) a fiduciary is? In the financial world, there are two types of advisors:

If you understand what a fiduciary is, youll see that advisors who are fiduciaries are required to do whats best for you. Advisors who are not fiduciaries are not held to such a standard. Its perfectly legal for them to put their own interests first to act in a way that might not provide the best benefits to you. Obviously, you want to use a fiduciary advisor whenever possible because of their legal responsibility to you.

There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are NOT considered fiduciaries:

• Stock Brokers
• Insurance Agents
• Real Estate Agents acting on the other partys behalf (This is common when you are buying, as most real estate agents are acting on behalf of the seller.)

Advisors in this group do not represent you. They represent themselves, their company, or someone else. They have no legal responsibility to act in your best interest. They are simply not permitted to commit fraud or provide you with unsuitable recommendations. But the unsuitable standard is very broad and difficult to impose.

On the other hand, people in these groups are considered fiduciaries:

• Registered Investment Advisers (RIAs) or Investment Adviser Representatives (IARs)
• Insurance Brokers
• Real Estate Agents acting on your behalf
• CPAs
• Attorneys

Advisors in this group are legally required to act and advise you only for your benefit and interests. They can never act in a way that is contrary to what is best for you. They must act with undivided loyalty to you. If they fail to do so, you are entitled to legal action against them. Its not enough for them to just provide suitable recommendations. They must try their hardest to provide you with the best advice possible.

Lets use a simple example. If you go to a stock broker, the broker can recommend you invest in Fund A (as long as its suitable) even though Fund B is better for you. Why would he do this? Probably because Fund A will give him a higher commission.

Now lets say you go to a Registered Investment Adviser (or an Investment Advisor Representative someone who works for an RIA). Because RIAs have a fiduciary duty to their clients, theyll always be required to recommend you invest in Fund B since its your best option. RIAs cant receive commissions or do anything thats not in their clients best interests. So who do you want to get your advice from? The stock broker or the RIA?

Its quite clear that fiduciaries are held to a much higher standard than non-fiduciaries. Whenever possible, you should seek to obtain advice from people who are held to a fiduciary standard. Ask your advisors if they are fiduciaries. Ask them if they are required to always act in your best interests. They are required to answer truthfully, and you should be wary of those who cannot answer with a confident and resounding yes.

Have you ever heard of the term fiduciary before? Is there any aspect of the fiduciary duty/standard youre not clear on? Let me know in the comments, and Ill do my best to answer your questions!

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