Whether you're brand-new to investing or are decades into saving for retirement, you want to know that the people managing your money are putting your best interests first. In legal terms, that's called a "fiduciary relationship." A fiduciary is a financial professional legally bound to invest your money without thinking of his or her own gain and without any potential conflicts of interest.
But how do you know if your financial adviser is a fiduciary? Financial professionals go by so many different names nowadays: money managers, wealth advisers, financial planners, investment advisers, brokers, etc. What do those job titles really mean, and which of those fields are regulated to ensure that your money is in safe hands?
We spoke with Dirk Edwards, a CPA (certified public accountant) and financial planner with decades of experience advising clients on aligning their financial resources with what is meaningful and important to them. It turns out that not all investment professionals are fiduciaries, and smart investors need to know which questions to ask before they put just anyone in charge of their financial future.
Why Fiduciaries Matter
After millions of Americans lost everything in the 1929 stock market crash and ensuing Depression, President Franklin D. Roosevelt created the Securities and Exchange Commission (SEC) in 1934 to regulate Wall Street. The Investment Advisers Act of 1940 was the first to classify investment professionals as fiduciaries with the responsibility to put the client's interests first, act in good faith and disclose all conflicts of interest.
"Being a fiduciary means that you have an obligation to make sure you're putting your client's best interest at the forefront of what you do," says Edwards. "If you're holding assets for a client or group that generally comes with a legal authorization and duty to make decisions on behalf of the other party. The law generally holds a fiduciary to a higher standard than someone who is not in a fiduciary relationship."
Let's say you ask your brother-in-law to deposit a paycheck for you and he loses it on the way to the bank. You could get mad at your brother-in-law, but you probably couldn't sue him, because it's not his fiduciary responsibility to properly deposit your paycheck. But if you own a business and have your clients send payments directly to your CPA, she has a fiduciary responsibility to make sure they get deposited in the right place. Fiduciaries are held to a higher legal standard.
Even with the SEC and state financial regulators, Edwards says that anyone can call themselves a "financial planner" and start charging for financial planning advice. "That doesn't require any sort of license," he says.
To avoid putting your money in the wrong hands, it's important to know which types of financial advisers are licensed and which are held to the highest fiduciary standards.
All Registered Investment Advisers Are Fiduciaries
As Edwards said, anyone can post a sign in a storefront and call themselves a "financial planner," but the SEC and state regulators have created a system for registering investment advisers. You can even look people up by name and check if they are registered investment advisers.
Under the Investment Advisers Act, all registered investment professionals are fiduciaries. Their fiduciary responsibilities fall into two major categories:
- Duty of care: To provide advice that is in the best interest of the client and to seek the best execution of the client's wishes.
- Duty of loyalty: To eliminate any potential conflicts of interest. The adviser must never allow his or her judgment to be influenced, consciously or unconsciously, by anything but the client's best interest.
As of 2018, there were more than 17,000 smaller investment advisers registered with individual state regulators, and more than 13,000 "large" investment advisers (meaning they manage more than $100 million in assets) registered with the SEC.