Does Your Advisor Have a Fiduciary Relationship to You?

fiduciary relationshhip

You might assume an advisor would have your best interest in mind.  This isn’t always the case.

Different types of advisors are held to different standards of care.

What about your financial advisor? Does your advisor have a fiduciary relationship to you?

What exactly is a “fiduciary relationship”?


Definition of Fiduciary

Fiduciary advisors are advisors that follow a higher duty of loyalty in their client relationships. These advisors are legally held to a standard of trust and care to always act on behalf of their clients’ best interests.

Similar to a physician’s duty of care to act in the best interest of their patient, fiduciary advisors consider it their duty to maintain good faith, integrity, and trustworthiness while dealing with their clients’ financial portfolios.

The legal dictionary definition of fiduciary condensed from West’s Encyclopedia of American Law:

A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person. Mere respect for another individual’s judgment or general trust in his or her character is ordinarily insufficient for the creation of a fiduciary relationship. The duties of a fiduciary include loyalty and reasonable care of the assets within custody. All of the fiduciary’s actions are performed for the advantage of the beneficiary.


Two Types of Financial Advisors

It would seem that all financial advisors should meet this standard of care, but some don’t. It depends on what they do for you, how much money they deal with, and other factors varying by state.

Advisors are broken down into two types: fiduciary advisors, and every other advisor.

Fiduciary Advisors

Fiduciary advisors have a confidential relationship with you. They cannot divulge any of your personal information unless you have specifically given permission to do so.

They also have a fiduciary duty to you and no loyalty to any other company. They aren’t held to as high a standard as attorney/client privilege, but there are legal ramifications if they breach their fiduciary obligation to you.

When you work with a fiduciary advisor, you will notice that they take a considerable amount of time to get to know your unique needs and goals and then create a financial investment strategy based on those goals.

As an advisor, they may, at times, have a financial interest in a product that might benefit you as well. If this occurs, a fiduciary advisor is required to disclose any conflict of interest they have. Once the conflict of interest is disclosed, you have the option of continuing to follow their advice or choose not to.

Fiduciary advisors follow a strict fiduciary standard of conduct. A few of the standards listed include declining any sales-related compensation and explaining in clear detail all disclosures and agreements to their clients.

Fiduciary advisors usually only charge an asset-based or project fee for their services.

There are a few different titles that are considered fiduciary advisors. These include:

Other titles are sometimes fiduciary advisors. It’s important to be certain that they do, in fact, act as a fiduciary advisor. Do not assume, or you could be sorely mistaken.

These include:

Learn more about what you should look for in a financial advisor. Download our free e-book, Essential Elements of Financial Planning.

Non-Fiduciary (Suitability) Advisors

There are certain reasons why an advisor would not be considered fiduciary. The first and foremost of these reasons is that they are loyal to their company as an employee, not the client. They are what is known as self-dealing: they are acting in their own interest rather than yours.

This means that they will advise you to purchase products or trades that profit their company. Of course, in order for you to agree to these, it would have to sound feasible — or suitable — for you to benefit.

This word suitable is very broad, and non-fiduciary advisors can apply this to many things. They are not required to only sell you products that are in your best interest, and they often come into a conflict of interest when advising how to invest.

They cannot make any sales without your consent, but they will do their best to get your consent for purchases that they will make a commission from.

Commissions are the main goal of a non-fiduciary advisor because they can greatly increase their income in this way. These advisors can still make a commission on sales of products even if they charge a fee.

These are common titles of non-fiduciary advisors:

  • Broker
  • Agent
  • Investment Consultant


How to Tell If Your Financial Advisor Has a Fiduciary Duty to You

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There may be times when the water is murky, and you can’t be sure whether your advisor has a fiduciary obligation to you or not. More often than not, if you aren’t sure, then they probably are not fiduciary.

This is because fiduciary advisors are totally transparent and will keep you very informed. They have nothing to hide and are dedicated to ensuring your best outcome financially.

The Obama administration attempted to instill a rule through the Department of Labor that would provide more transparency of a financial advisor’s fiduciary capacity. This rule would require all advisors to disclose any potential conflicts of interest, as well as their fees and commissions upfront.

In June 2018, this rule was ruled against by the Fifth Circuit Court, stating that the Department of Labor has no authority to instill this rule.

Nevertheless, even without this rule, there are ways to tell if your advisor is, in fact, a fiduciary advisor.

Look at the Compensation Model

How your advisor earns money says a lot about their relationship to you. Do they take a fee or a commission? Even if they do accept a fee, do they also make a commission or push the purchase of a certain product?

When analyzing their compensation, look for these two red flags:

  • Commissions based on sales
  • Proprietary products

Ask Pointed Questions

The easiest way to tell if an advisor is a fiduciary advisor is simply to ask them point-blank questions such as, “Do you have a fiduciary duty to your clients? Can you provide a written promise of such?”

True fiduciaries should be able to answer simply and provide proof. If they beat around the bush or give you a lengthy, jargon-filled answer, they aren’t fiduciary.

Some other questions that you should ask your financial advisors include:

  • Do you have a legal obligation to act in the best interest of your clients?
  • Do you hold any licenses or certifications?
  • What services do you offer to your clients?

Another question you can ask your advisor, fiduciary or not is:

What is your investment strategy?

A good fiduciary advisor would have an investment strategy that would include a variety of approaches. They would base their strategy on each of their clients’ individual situations, not use a one-size-fits-all strategy. Their strategy should also include a detailed planning process and a consistent review process.

Even if your advisor has a fiduciary duty to you, if you find that they don’t follow the above standard for investment, it would be in your best interest to find a new advisor.

Ask For Paperwork

Getting proof of their fiduciary duty to you is simple; ask for paperwork.

Two forms that fiduciary advisors obtain are Form ADV and Form CRS. These are simply forms that they had to fill out and file with the SEC. These forms will allow the SEC to keep tabs on the way they conduct business and investigate if any complaint is made.

You should also ask for their credentials, such as their licenses and certifications. This will give you a better idea of their specialization in the finance industry.

If they can provide references and plenty of happy clients that are willing to vouch for their integrity, this can really solidify your trust in them.

Meet our team! Learn more about why Physicians Thrive is a trusted resource for physicians planning their financial futures.

What to Do If a Breach of Fiduciary Duty Occurs

fiduciary duty breach

If you have found yourself in a situation where you are questioning your advisor’s integrity to their fiduciary duty, what can you do?

Be assured that a breach of fiduciary duty is no small matter. Your advisor has taken an oath to uphold the highest standard of loyalty and care to you. When they break this oath, they must answer for it.

Take Legal Action

You are entitled to damages if a fiduciary advisor does anything with your investments for the purpose of their personal interests. The only way to get those investments back, however, is to take legal action.

You need to file a formal complaint and talk to a lawyer to see what your rights are and if they can build a case against this individual.

Fiduciary duty will need to be proven on the side of the advisor as well as the breach that occurred. Then you will need to have proof of the damages that resulted from this breach by the advisor.

If you have signed an arbitration clause in your contract with your advisor, you won’t be able to take legal action, but you can request the help of FINRA. They will look into the facts, and you may still be awarded damages, but there will be no legal action taken against the advisor.

Fiduciary legal terms, as well as laws and their severity (like New York’s Martin Law), vary by state. If you suspect that your advisor has failed in their legal duty to you, check your state laws or speak with a law firm. For more information about your advisor’s fiduciary duty as defined and enforced at the federal level, check with the SEC.

Examples of Breach of Fiduciary Duty

You may be wondering what exactly qualifies as a breach of fiduciary duty.

Here are a few examples:

Misrepresentation of the Facts

If you find that your advisor has made untrue statements about any of the investments that they are advising you to make, this is a breach of fiduciary duty. The breach can be regarding any of the fees, services, or products included in an investment, or failing to provide you with accurate, pertinent information.

Negligently Handling Your Investments

Any of the following could be considered negligent handling:

  • Steering you toward an investment that won’t benefit you
  • Failing to do due diligence when researching a certain trade
  • Simply neglecting their fiduciary responsibility to work toward improving your financial future

Unauthorized Trading

In no way should a financial advisor make any investments or trades with your money without first divulging their intent and reasons for doing so and getting your permission to move forward.

Account Churning

Some advisors try to make money off your investments through account churning, or making excessive trades from your account and reaping the commissions from these trades.

Stealing

Unfortunately, there have been some advisors who have been caught using their clients’ accounts to buy securities for themselves.

Given that there are so many ways for a financial advisor to take advantage of their clients, it’s important that you establish a relationship of trust with yours.


Why Should You Only Accept a Fiduciary Advisor?

Is it really worth all the trouble of establishing whether or not an advisor has a fiduciary relationship to you?

Why is a fiduciary advisor so much better?

Fiduciary advisors always provide knowledgeable and ethical investment advice. This is because fiduciary advisors usually have more education and training than non-fiduciary advisors.

They also are kept up to date with new investment strategies and rules because they often belong to advisory groups like the SECNAPFA, or CFPB.

With the help of a fiduciary advisor,  you get a transparent expert that is able and willing to explain their strategy with you on how they plan to invest your money.

If a breach of duty is committed, with a fiduciary advisor, you have legal options. Non-fiduciary advisors are not held to this standard of care and cannot be held liable.

You deserve to have an advisor that will deliver the highest standard of care to you. Otherwise, why not just take the risk and make your own investments and pocket the fees you would pay an advisor?

You work hard to earn your money, don’t expect any less from your advisor.

Related: How to Work With an Investment Advisor


Whenever you place special trust in someone to help plan your financial future, make sure you ask how they work.

If you don’t know if your advisor has a fiduciary relationship to you, you really don’t know how they will manage your money.

Taking a few extra steps to ensure that your advisor will, in fact, give financial advice in your best interest, can help protect your financial future.

If you are interested in learning more about how the fiduciary advisors at Physicians Thrive can help you, contact us. Or, check out our financial planning resources prepared especially for physicians.

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