A fiduciary is an individual that acts on the behalf of another individual to manage his or her assets.  Being a fiduciary means being ethically bound to act in the best interests of the other individual.

A fiduciary is an individual who is obligated legally to act in your best interests.  The responsibilities and duties of a fiduciary are both legal and ethical.  When an individual takes on the fiduciary role for another individual, he or she must act in the best interest of the person whose assets he or she is managing.  A fiduciary is expected to manage the assets to the benefit of the other individual, rather for their own profit, and cannot personally benefit from their management of said assets.

Generally, the fiduciary cannot make a profit from the relationship unless he or she is granted consent to do so when the relationship is first formed.

Individuals who sell investments must be fiduciaries, which is a term that simply describes an individual that puts the interests of the investor ahead of their own or their company’s interests.  Laws governing trusts have used the term fiduciary for hundreds of years to describe any individual you appoint to control your money when you cannot do it yourself or simply do not want to do it yourself.  The key factor regarding a fiduciary is that they are legally not allowed to secretly profit from the relationship and therefore must put the needs of the client ahead of their own needs.

Many common business relationships include fiduciary duties such as:

  • Trustees and the beneficiaries,
  • Company board members and the shareholders,
  • Lawyers and the clients, and
  • Investment corporations and the investors.

How to Determine if the Person Managing Your Money is a Fiduciary

By law, some financial services people must be fiduciaries.  Unfortunately, this is not usually the case.  Individuals working in the world of finance go by many different titles, such as brokers, financial advisors, or wealth managers, to name a few.  Current laws state that individuals using the title of financial advisor must be fiduciaries.  Not all others have to assume that role, meaning that it is legal for him or her to give you advice that benefits them, and is not necessarily the best advice for you.  The advice must only be reasonable, and not necessarily the most effective or the best advice for you.

The best and easiest way to determine if your financial advisor is acting as a fiduciary is to simply come out and ask them.  If he or she says that, yes, they are acting as a fiduciary you should get it in writing.

What is the Best Way to Ensure That my Advisor is Acting as my Fiduciary?

One way is to get the individual to sign an agreement that he or she will act as a fiduciary at all times.  Unfortunately, that is easier said than done.  Many big companies will not allow their advisors to sign any such agreement.  Instead, you may want to look for advisors that are paid on a fee-only basis.  This means that the only money you pay is the percentage the advisor charges you each year to manage your money.  To determine if your advisor is fee-only, ask him or her if they receive any compensation from sources other than the fees you pay annually.  Such individuals can be more difficult to find, but there are advisors who maintain a high fiduciary obligation in order to avoid any conflicts and put the clients’ interests ahead of their own.  You simply need to put in the time to find these individuals, and, thankfully, they definitely do exist at affordable prices, even for those with small accounts.

Final Word

Beware, not every individual out there who wants to manage your money is a fiduciary.  This means that some of these individuals will give you suitable advice, but advice that also benefits him or herself.  It may not actually be the best advice for you and your situation.  Find an individual who is a fiduciary, as he or she must put your needs before his or her own.