Fiduciary vs. broker: What’s the difference, and who should you work with?

A fiduciary, or fiduciary financial planner, is a financial advisor who is legally bound to always act in their client’s best interest. Fiduciaries must always put their clients’ needs ahead of their own and are legally required to disclose any potential conflicts of interest to their clients. It is their duty to ensure they provide their client accurate and complete information to the best of their ability.

A broker-dealer, or broker, is a company or person in the business of buying and selling securities who acts as an intermediary between a buyer and seller. Brokers are typically compensated through commissions on products they sell to clients, and are not mandated to act in their clients’ best interest. They have access to various markets and can help clients access different investment options based on their needs.

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While both brokers and fiduciaries are financial professionals, they do not operate the same way. One of the core differences between a fiduciary and a broker lies in the standard that governs these practices. Here are some of the key differences that set both apart:

Fiduciaries abide by the legal fiduciary standard of care set by the Securities and Exchange Commission (SEC). They are legally required to fulfill their fiduciary duties and act in the best interest of their clients. 

Brokers, on the other hand, don’t need to put their clients’ interests before their own and instead abide by the suitability, or “best interest,” standard. The suitability standard only requires that brokers make “suitable” decisions for their clients that fit their financial goals. 

Therefore, legal obligations require fiduciaries to follow their guiding rule to do what’s best for the client, while brokers don’t necessarily have a clear bar (or legal obligation) when it comes to deciding which products are suitable for the client, meaning the products they recommend don’t exactly have to be the “best.”

Another notable factor between a fiduciary versus a broker is the way they are compensated. Fiduciaries are generally not allowed to receive commissions, as conflicts of interest can arise for the client, and are therefore usually paid through a fee-only compensation. Fiduciaries must prioritize the client's well-being above their own profit, which eliminates conflicts of interest on certain product recommendations. 

Brokers, however, often earn commissions on products they sell, which can lead to conflicts of interest. If potential biases arise, brokers can still put their well-being first, earning them commission on a product that may not have been the best choice for the client.

Rules related to conflict disclosure hold fiduciaries to a higher standard. Fiduciaries are obligated to provide transparent services and are required to fully disclose any potential conflicts of interest to their client. This ensures that fiduciaries provide the highest standard of care when advising their clients. 

On the other hand, brokers have less stringent rules when it comes to disclosing conflicts. Brokers are not obliged to communicate conflicts of interest to their client (unless required by specific laws), meaning they can put their interests above those of the client.

It is important to stay informed when choosing who to manage your money and other assets, as you want to ensure decisions are being made in your best interest as a client.

It is also important to note that brokers may be mistaken as fiduciaries, but it is now clear that they have distinct differences. While brokers are not necessarily fiduciaries, some may take on a fiduciary duty. If this is the case, it is important to ask questions as a client to ensure you know what role they are playing when giving you certain financial advice.

While certain cases do obligate fiduciary brokers to uphold fiduciary duty at all times, such as in the case of professionals from a fiduciary brokerage, those who simply hold both titles are not always obliged to act as a fiduciary. This means that they can “change hats” when giving you certain advice — for example, starting off as your fiduciary but switching roles to act as a broker when a certain product earns them a higher commission.

Therefore, as it may be hard to know what “hat” they are wearing at any given time, you might want to ask questions such as: 

• Are you a fiduciary at all times when working with me?

• Will you disclose when you are acting as a broker rather than a fiduciary?

• How are you compensated? And do you earn commissions for selling certain products?

This can help you determine the trustworthiness of your advisor and help you get a better sense of what their motive is.

Despite potential risks that may arise due to the suitability standards, brokers may still be appropriate for certain clients. It is important to understand the roles of the two while also having clear financial goals to help you decide which service you can benefit from the most. As your life evolves and your priorities change, you may benefit from either or both.

Here are some examples of theoretical situations where you could hire a fiduciary vs. a broker, or both:

In essence, fiduciaries can help you when you want objective, personalized financial advice and a long-term relationship based on trust and comprehensive planning, while a broker can be helpful when it comes to specific transactions or accessing certain investment products. 

When making big financial decisions, it is important to determine your goals, needs, and risk tolerance. Doing so can help you determine what kind of professional help you need. Fiduciaries and brokers can help you reach your goals, but you may want to do your background research before choosing who to work with.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.