What is a Fiduciary?

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A fiduciary is someone with the legal and ethical duty to act in another party’s best interest — like an attorney, trustee, or financial advisor.

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🤔 Understanding a fiduciary

Fiduciaries have a legal and ethical duty to act in their clients’ best interests, even at the expense of their own. Fiduciaries can serve in a variety of roles, such as a financial advisor, attorney, guardian, trustee, or executor. Some financial advisors are fiduciaries, while others — often those paid on commission — are not. Brokers have to ensure their investment recommendations are suitable for their clients, but they aren’t necessarily fiduciaries.


When you hire a financial advisor, you can choose between one who is a fiduciary or one who is not. Financial advisors who are fiduciaries have a legal duty to act in your best interest when managing your investments or providing advice. They are usually “fee only,” meaning they get paid a fixed sum (a flat rate, by the hour, or as a percentage of assets under management), rather than pay that varies based on what they sell you. Commission-based advisors get paid based on the products you buy; they can be fiduciaries, but they don’t have to be.


A fiduciary is sort of like a babysitter…

When parents leave their kids at home with someone, they are putting the utmost trust in that person. The babysitter has an ethical, and in some cases legal, obligation to put the safety and interests of the children ahead of their own. Similarly, a fiduciary is a professional to have your best interests in mind, not their own.

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What does a fiduciary do?

All fiduciaries have one thing in common: a legal and ethical duty to act solely in the best interest of their clients, even at the expense of personal benefit. Beyond that, there are a variety of fiduciary relationships:

Trustee and beneficiary

Trustees oversee a trust on behalf of someone else (the beneficiary). They have responsibilities that can include distributing money to beneficiaries, tracking income and distributions, filing taxes, and managing investments. As a fiduciary, the trustee must carry out these tasks based on the interests and wishes of the settler and beneficiaries, and based on a high standard of care.

Executor and beneficiary

An executor, often named in a will, is charged with managing an estate after someone dies. This can include settling debts, handling taxes, and distributing the estate’s assets to beneficiaries. Executors have to act in the best interest of the estate, not themselves, and carry out their responsibilities to beneficiaries.

Board member and shareholder

Members of corporate and nonprofit boards are fiduciaries. Each of them have to actively participate in their roles and ensure that the organization is working towards its stated mission while following laws and regulations, and act loyally in the organization’s best interest.

Guardian and ward

A guardian is legally responsible for making decisions for someone who can’t do so on their own (a ward), usually a minor child or incapacitated adult. The guardian is a fiduciary who must always have the ward’s best interest in mind. For the guardian of a child, that can include decisions about schooling, medical care, daily welfare, and more.

Attorney and client

Some of the fiduciary duties of attorneys include competence (having legal knowledge and skills and doing their job to the best of their abilities), managing conflicts of interest, communicating necessary information to clients, and keeping most client-related matters confidential. Courts take it very seriously when an attorney breaches the trust and confidence of a client.

Investment advisor and investor

Financial advisors can manage money on their clients’ behalf, recommend investments and other financial products, and provide advice about retirement, among other things. An advisor who is a fiduciary must put their client’s interests before their own, share all relevant information, and manage conflicts of interest.

Fiduciary and Employee Benefit Plan

Every employee benefit plan, such as your 401(k) plan, is required to be administered and operated by a named fiduciary. This named fiduciary is obligated to discharge their duties prudently, loyally, and pursuant to the written instrument governing the plan. If they fail in these duties, they may be sued in federal court pursuant to the Employee Retirement Income Security Act of 1974 (ERISA).

What if a fiduciary breaches responsibility?

It’s against the law for fiduciaries to breach their duties, and they can be held liable in court if they do. A fiduciary’s client or ward can sue to recover damages, such as any money that they may have lost due to the fiduciary’s misconduct.

What is the difference between a fiduciary and a financial advisor?

Some financial advisors are fiduciaries, but “fiduciary” is a broad term that also encompasses many other professions. And not all financial advisors are fiduciaries.

Financial advisors who are fiduciaries have extra responsibilities:

  • They must put their client’s best interests before their own.
  • They must act in good faith.
  • They must appropriately manage conflicts of interest.
  • They cannot profit from the relationship without explicit permission from the party represent.

The best way to learn whether your advisor is a fiduciary is simply to ask. Many fee-only financial advisors are fiduciaries, while many that are paid on commission are not. Advisors that are Certified Financial Professionals (CFPs) or Chartered Financial Consultants (ChFCs) have to live up to professional standards, though they may not be fiduciaries. Broker-dealers, tax professionals, and insurance brokers are not typically fiduciaries.

What is the suitability vs. fiduciary standard?

Brokers and certain other professionals who help manage investments aren’t fiduciaries, but they have to fulfill a “suitability” requirement. This means that the recommendations they make must be suitable for the customer, as defined by the Financial Industry Regulatory Authority, a non-profit watchdog that oversees brokers.

The suitability standard that brokers follow doesn’t perfectly align with obligations that fiduciaries such as investment advisors may have. For example, a non-fiduciary financial advisor might recommend an investment that is suitable for a client and earns the advisor a commission, even though it’s not the absolute best choice. Brokers and other non-fiduciaries may also have different disclosure responsibilities than a fiduciary.

What questions should I ask before hiring a fiduciary?

When it comes to hiring a financial advisor, choosing the right one is not a decision you should take lightly. If you’re looking for an advisor who is also a fiduciary, there are some important questions you might want to ask.

Are you a fiduciary?

The very first question to ask a potential financial advisor is whether he or she is, in fact, a fiduciary. Any financial advisor can tell you they will act in your best interests, but only fiduciaries are legally required to do so. Non-fiduciary financial advisors have to recommend suitable products, while fiduciaries are subject to a higher standard.

What are your qualifications?

Financial professionals come from many different backgrounds and have a variety of qualifications. Some may have years of education and recognized certifications, while others may only have passed a test with no background in finance. FINRA maintains a database of professional financial designations where you can learn more about what someone’s credentials mean. Professionals in this database include Certified Financial Planners, Registered Financial Planners, and Accredited Investment Fiduciaries.

How do you get paid?

Financial advisors can charge you in various ways, including:

  • A percentage of the assets they manage for you
  • A flat fee for a specific set of services
  • An hourly fee

Some financial advisors work on commission, which means they make a certain amount for selling you a product or service. If your financial advisor says they work on commission, that may mean — but doesn’t necessarily — that they are not a fiduciary and may not always act in your best interest.

How much will I be charged?

No one likes to be surprised by unexpected fees. It’s important to ask any potential advisor how much you will have to pay for their services and when. This should include any hourly fees, percentage-based fees, and other costs associated with your investments.

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