Financial planner fiduciary duty: What it means and why it matters

A fiduciary is an individual or organization that acts on behalf of another party and is required to act in the best interest of that party (the beneficiary or client). In a financial context, this often applies to financial advisors, trustees, corporate board members, and attorneys. For the purpose of this article, the use of ‘fiduciary’ will be referring to fiduciary financial advisors.

Fiduciary financial advisors must always act in the best interest of their clients, only recommending investments and other relevant products that are most fit for the client. Fiduciary financial planners must abide by certain rules and regulations. Some types of financial advisors, but not all, are bound by fiduciary duties, including certified financial planners and registered investment advisors.

Fiduciary duty is the legal and ethical obligation requiring one party (the fiduciary) to act in the best interest of another party (the client or beneficiary). A fiduciary must always put their client’s needs above their own and provide honest, unbiased advice while avoiding any possible conflicts of interest between themselves and their client.

Fiduciary duty helps build trust and accountability between a fiduciary and a client. Violating the fiduciary duty can result in legal consequences, including fines or lawsuits.

Fiduciary financial advisors have several responsibilities, calling for them to act in their client’s best interest instead of their own. This includes: 

• Disclosing all fees, commissions, or potential conflicts.

• Offering competent and careful advice based on fully accurate information

• Avoiding self-dealing or using the relationship for personal gain.

It is crucial to uphold all legal and ethical duties to maintain fiduciary status. While most fiduciary duties go hand in hand with each other, the fiduciary responsibilities of a financial advisor can be broken down into three types of duties: duty of care, duty of loyalty, and duty of good faith. 

Duty of care is the fiduciary duty of a financial advisor to provide financial advice with the skill, diligence, and expertise expected of a competent professional. This includes conducting thorough research, understanding the client's financial situation (including risk tolerance and investment horizon), and tailoring recommendations to meet the client’s goals. 

For example, if an advisor is not too well-versed on a particular subject, then they are expected to perform due diligence to gain insight and knowledge on that subject before recommending investment strategies or products. This can help ensure they can guide the client to the best of their ability.

Duty of loyalty, oftentimes referred to as the cardinal principle of the fiduciary relationship, entails a financial planner’s fiduciary duty to always act in the client’s best interest, putting it ahead of their own or their firm’s. 

Fiduciaries must avoid conflicts of interest, and if a potential conflict exists, it is their duty to fully disclose it to the client. For example, advisors are not allowed to recommend an investment product that is not entirely the right fit for the client just because it will earn the advisor a higher commission.

Fiduciary financial advisors are also forbidden from misusing or disclosing confidential information for their own gain. Therefore, a fiduciary may need to excuse themselves to prevent possible conflicts of interest if needed.

Duty of good faith, also known as duty of integrity or honesty, requires a fiduciary to act with honesty, transparency, and integrity in all dealings with the client. Duty of integrity is the fiduciary duty of a financial advisor to communicate clearly, provide accurate information, and never mislead or deceive the client. It also ensures fair deals and trades between the advisor and client.

These duties form the foundation of fiduciary responsibility and are intended to ensure clients receive trustworthy, unbiased advice. They are also what distinguish a fiduciary financial advisor from non-fiduciary advisors, who, on the other hand, may only need to meet a suitability standard — essentially meaning recommendations only need to be ‘appropriate’ and not necessarily the best fit.

When seeking professional financial advice, you may want to ensure your money and assets are being managed by someone trustworthy. With that being said, it is important to note that not all financial advisors are fiduciaries; therefore, not all financial planners are guaranteed to uphold fiduciary responsibilities. 

In general, certified financial planners (CFP) and registered investment advisors (RIA) adhere to fiduciary standards. It is crucial to ask your potential advisor if they are a fiduciary and what certifications they have. As there are many types of financial advisors, as well as certifications and licenses, it is important to verify the status of your advisor to ensure whether they are a fiduciary. You can do this by simply asking them or checking if they are registered with the United States Securities and Exchange Commission (SEC) or other online tools, such as using FINRA’s BrokerCheck.

If you want to learn more about how to find the right financial advisor for you, our page on how to find a financial advisor will help guide you on what steps to take.

Breaches of fiduciary duty occur when a fiduciary partakes in actions that violate, or are counterproductive to, the interests of a beneficiary. These inappropriate actions are then thought to have benefited the interest of the fiduciary over that of their client. 

This can happen due to misunderstandings, misinterpretations, or misguided advice and can lead to various consequences for the fiduciary. As a client, if you suspect that your fiduciary financial planner has breached their fiduciary responsibility, you might want to terminate the relationship in a timely manner. If you have experienced financial damages as a consequence of the breach, you may be able to file a civil claim to recover your losses. However, proof is needed in order to verify a breach was committed.

If your claim is successful, you may be compensated for the damages, and the fiduciary financial advisor will face disciplinary action. Fiduciaries can face significant legal consequences if found guilty of breaching fiduciary duty, including paying damages to the client, losing their licenses, and damaging their trustworthiness. 

Overall, fiduciary duties are meant to ensure that the fiduciary always acts diligently in the best interest of the client. While it is expected that fiduciaries act with a high standard of care and professionalism, understanding your rights as a client can help you protect yourself in the event of malpractice.

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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.