Fiduciary: Meaning, Examples And How To Find One

You’ve likely heard the term fiduciary used in investment circles. Although that is one context in which a fiduciary is important, it is not the only time when you might need one.

A fiduciary is any person or organization that’s able to act on the behalf of another person. Today we’ll take a closer look at the role of a fiduciary and why it’s important to work with one.

What Is A Fiduciary?

Understanding The Fiduciary Duty

When you place your trust in a fiduciary, they’re obligated both ethically and legally to safeguard your best interests.

This stems from an 1830 court ruling that created the prudent person principle. The famous court case, Harvard College vs. Amory, led to the idea that someone managing the financial interests of another party should act in the best interests of the beneficiary, not in a way that would benefit them personally. With that ruling, the law now requires any fiduciary to act with care, intelligence and discretion when managing assets on a beneficiary’s behalf.

The standards of the prudent person principle that encompass the fiduciary duty include:

• Solely using comprehensive and accurate information when giving investment advice.
• Explicitly disclosing when a conflict of interest arises and avoiding them in general.
• Emphasizing clarity and transparency toward any fees charged for fiduciary services.
• Avoiding the usage of client assets to benefit the fiduciary in any way.

Beyond the need for appropriate management of assets, fiduciaries are limited in the way they can profit from their advice. In most cases, a fiduciary cannot accept profits from their decisions on your behalf. However, they can profit from their duties if the beneficiary agrees to the specific terms ahead of time.

Fiduciary Standards Vs. Suitability Standards

As you seek a professional to work with, you may run into some confusion between suitability standards and fiduciary standards. It’s completely normal to confuse the two because there is a substantial amount of overlap in terms of applicable knowledge and decision making between them. However, it’s important to understand the difference. With that, we break down the two below.

Fiduciary Standards

Fiduciary standards were put in place and are regulated by the Securities and Exchange Commission (SEC). The standards bind the fiduciary to put the needs of the client above their own interests. Here are a few standards that fiduciaries must uphold:

• The fiduciary puts the beneficiary’s interest ahead of their own.
• The fiduciary avoids all conflicts of interest regarding the beneficiary’s account.
• The fiduciary has explicit and thorough communication with the beneficiary that delineates all reasoning and evidence toward asset-management decisions.

An example of these standards would be that a fiduciary is unable to buy an investment for a client that would result in a higher commission for themselves or their investment firm, over an asset that would be more beneficial for the client.

Suitability Standards

On the other hand, suitability standards are different from fiduciary standards. The loose definition of these standards is that the advisor must make a recommendation that is in the best interest of their clients. All that is necessary is that the advisor believes that the decisions are helpful to the client and avoid excessive transaction fees.

The suitability standards that advisors generally uphold include:

• The advisor makes suggestions that are suitable for the client.
• The advisor divulges all material information.
• The advisor prices their services related to current market trends.
• The advisor completely discloses any conflicts of interest.

In most cases, the primary source of income for an advisor is commissions earned from the sale of certain investment products. With that, you can easily discern a potential conflict of interest. After all, why shouldn’t the advisor try to sell products that benefit their bottom line?

Breaches Of Fiduciary Duty

If a fiduciary does not act in the best interests of their beneficiary, then it is considered a breach of their duty. There are a few things that need to be in place in order for a breach to occur.

First, the relationship between the fiduciary and the beneficiary must have been established at the time of the breach in question. Second, the breach must have occurred within the scope of that fiduciary relationship.

A breach could be any action that isn’t in the best interest of a client or any actions that benefit the fiduciary’s interests as opposed to the client’s. Another way for a fiduciary to breach the trust of the relationship is to fail to disclose conflicts of interest as they arise or other important information that is relevant to the relationship.

If a fiduciary fails to uphold their duties, it could lead to legal consequences. In most cases, the beneficiary would have the right to pursue the recovery of anything lost by the breach. However, it can be difficult to determine what is a breach and what isn’t because people make different choices based on the information available. When in doubt, consult a lawyer about your options if you think there has been a breach of fiduciary duty.

Types Of Fiduciary Relationships

• Attorneys and clients. Attorneys have a strict fiduciary duty to their clients. An attorney is required to act in complete fairness and fidelity to their clients in all dealings.
• Executor or personal representative. With a one-time financial transaction, an executor or personal representative may have fiduciary duties to their clients. For example, if you use a fiduciary to assist with a real estate transaction, they would be required to act in your best interests with minimal involvement on your part.
• Trustee and beneficiary. A trustee is given legal ownership of a trust’s assets so they can oversee their use and distribution. Based on the legal arrangement defined at the time the trust was created, the trustee can make decisions on how the beneficiaries of the trust can access the assets of the trust.
• Corporations and investors. A corporation has a financial duty to its investors. A stockholder in a company should expect the board of directors to uphold their fiduciary duties to the investors.
• Legal guardians and wards. A legal guardian has a fiduciary responsibility to their wards to make decisions that prioritize their best interests. In this case, it extends beyond financial responsibility. As a legal guardian, you’re responsible for ensuring that the minor is taken care of mentally and physically while maintaining their daily welfare until the child legally becomes an adult.

How To Find A Fiduciary

If you’re seeking out a financial advisor, then you likely want to ensure that they are bound to a fiduciary duty.

Start by asking around your circle of family and friends for positive fiduciary recommendations. Many will be happy to offer you the contact information of a trusted individual. Alternatively, you can seek out testimonials online.

Once you’ve found a few people you’re interested in working with, you’ll need to determine whether or not they are fiduciaries. Of course, you can ask them outright. Make sure to get their answer in writing and understand the scope of their duty. Take the time to determine that they’re able to uphold their fiduciary duties 24/7.

If you aren’t comfortable asking, then you can use the SEC’s advisor search tool to determine their standing. You’ll be able to find out more information about their credentials for your own peace of mind. If you choose to move forward with a fiduciary relationship, then make sure that the expectations and scope of the relationship are clear. If you have questions, don’t be afraid to ask. You should be comfortable with the fiduciary you choose to work with.

If you prefer to avoid a personal financial advisor, consider working with a robo-advisor to set your investments on the right trajectory.

Fiduciary FAQs

How much does a fiduciary cost?

The cost of a fiduciary can vary widely depending on their responsibilities and their payment structure. One of the most common payment structures for fiduciaries is a fee-only structure, meaning they are paid an hourly rate, flat rate, or a percentage of the assets they manage. Hourly rates can range from $200 to $400 per hour while flat rates can be anywhere from $1,000 to $7,500 per year. They can also charge around 1% of the total amount of the assets they manage for you. Fiduciaries may choose a fee-only structure to avoid commission-based payment structure that can present a conflict of interest. According to the National Association of Personal Financial Advisors (NAPFA), fee-only is the most transparent and objective compensation method.

What is an example of fiduciary duty?

There are several duties that make up the responsibilities of a fiduciary. One of the most important is the duty to avoid conflicts of interest. These conflicts can be any decisions that the fiduciary makes to further their own personal goals or enrich themselves. Even if the fiduciary believes that a decision will benefit their client, if they also stand to benefit personally, they can breach their fiduciary duty.

A typical example may be if a fiduciary financial advisor has a family member who owns a company and is looking for investors. The fiduciary may truly believe that their family member’s business is a great investment. However, their personal relationship to the business owner creates a conflict of interest. If the fiduciary advises their client to invest in the company, it would be reasonable for the client to believe that the fiduciary is putting the interests of their family members before those of their client. Even if the fiduciary believes the investment will make money for their client, it is best to avoid these types of situations altogether.

Why does someone need a fiduciary?

A fiduciary provides two essential elements to their clients: expertise and trust. Whether they are giving you legal advice, financial advice, or advice on other specific and complicated matters, fiduciaries can utilize their years of experience in the area to help their clients make informed decisions. However, this advice would not be nearly as valuable if the clients could not trust that it was given with their best interests in mind. Since fiduciaries are legally required to put their clients’ needs and interests above their own, their clients can sleep easy at night knowing they can trust their advisor.

Is a fiduciary worth it?

Ultimately, the decision to use a fiduciaries service is up to the client and only they can determine whether they need a fiduciary. However, for many investors or people dealing with complicated legal matters, knowing you have an experienced advisor that is legally obligated to put your needs above their own is a priceless tool to have.

The Bottom Line

As you seek professional help, it helps to know exactly what you’re looking for. In some cases, you may want an advisor with a fiduciary duty to uphold your best interests. In other cases, you might be more comfortable with a financial advisor who only upholds suitability standards. The decision is entirely dependent on your personal situation.

Even before you make the decision to meet with a fiduciary, it will be extremely helpful to have your finances in order so you can discuss your financial situation with clarity. Download the Rocket Money^SM app today to organize your upcoming bills so you can take control of your finances even before discussing them with an expert.