Investopedia says the following:
A fiduciary owes to clients a duty of good faith and trust. The highest legal duty of one party to another, being a fiduciary requires being bound ethically to act in the other’s best interests.
The CFP board defines the “fiduciary standard of care” as:
The fiduciary standard of care requires that a financial advisor act solely in the client’s best interest when offering personalized financial advice.
Who is bound by the fiduciary standard of care?
-Series 65 securities licensed advisors (such as Fee-Only advisors and Fee-Based advisors)
Who is NOT bound by a fiduciary standard of care?
-Series 7 securities licensed advisors (like those who work through Broker Dealers)
Practically speaking, what why does it matter if your advisor is a fiduciary?
The “standard of care” for advice given is higher for a fiduciary than a non-fiduciary.
Why does it matter?
From an attorney’s perspective, it means that the bar is higher when looking at the advice given. An insurance agent who is NOT a fiduciary who sells a product that is just OK (not the best) really does NOT worry about getting sued.
A fiduciary that sells just an OK product when there are better ones out there that he/she should know about (using the prudent advisor rule), SHOULD worry about getting sued.
So, in this example, the same OK product is sold and only the fiduciary has to worry about getting sued.
That’s why consumers like working with advisors who have a fiduciary duty. They are supposed to always be recommending NOT just OK products, but the “best” products.
Fee-Only advisors as fiduciaries
As you will read in the “bad” part of this website, it is my belief that many Fee-Only advisors violate their fiduciary duty to clients by not knowing and incorporating certain products (ones that pay commissions) into their financial plans for clients.
Roccy DeFrancesco, JD
Author of Bad Advisors: How to Identify Them; How to Avoid Them