Fiduciary vs. Financial Advisor: What’s the Difference?

female financial advisor in consultation with man and woman couple

When working with a financial advisor, it's important to know if they're a fiduciary. While anyone who provides financial advice could be considered a financial advisor, fiduciary financial advisors are typically certified and required to act in your best interest. Let's go over what you need to know about financial advisors and fiduciaries.

What Is a Financial Advisor?

A financial advisor is broadly considered any financial professional who offers advice on how to manage your money. This includes people who make recommendations and earn a commission from products they sell. Types of financial advisors include:

  • Certified financial planners (CFPs): CFPs may offer planning in all areas of personal finance, including investment planning, retirement planning, risk management, insurance planning, tax planning and more.
  • Chartered financial analysts (CFAs): CFAs specialize in investment advice and can help you with portfolio and wealth planning strategies.
  • Retirement income certified professionals (RICPs): RICPs specialize in helping people figure out the best way to maximize savings and income in their golden years.

Certifications required for financial advisors vary. However, people who give financial advice and earn a commission from selling products—like annuities or insurance—must pass a test and be licensed. For example, people who sell insurance, mutual funds, stocks or bonds may need to pass the Series 6 or Series 7 exams administered by the Financial Industry Regulatory Authority (FINRA).

Financial advisors can obtain other types of certifications, and these certifications may come with fiduciary duties.

What Is a Fiduciary?

A fiduciary financial advisor is someone who pledges to act in good faith, put the client's interests above their own and avoid conflicts of interest when giving financial advice.

A fiduciary may be a professional licensed by the Securities and Exchange Commission (SEC) or state regulator. For example, an investment advisor must be registered with the state or SEC and is required to uphold the fiduciary standard. The CFP Board also requires that certified financial planners operate as fiduciaries as part of its code of conduct.

A fiduciary financial advisor such as a certified financial planner might charge only advisory fees and not earn commission on products sold. With this fee structure, the advisor's income is separate from the products they recommend, which may give you more confidence in their recommendations.

Should You Work With a Financial Advisor or a Fiduciary?

Whether you should seek out a financial advisor who's a fiduciary depends on your financial situation and how you prefer to pay for services. Financial advisors typically charge by fee, commission or a combination of the two. A commission-based financial advisor who's not a fiduciary could appear to cost less upfront, but they might be paid a commission that's factored into the financial product in question. And a non-fiduciary financial advisor is not held to as high a standard when it comes to protecting your interests.

For money issues like estate planning and where to invest, a financial advisor who's licensed and has a fiduciary duty may offer you extra confidence that they have your back. With a fiduciary financial advisor, you know you're working with someone who is committed to helping you make the best decisions, and they are required to act in good faith.

How to Choose a Financial Advisor

Deciding which type of financial advisor to work with is an important decision. After all, they'll be responsible for helping you manage your nest egg. Taking the steps below could help you narrow down the best option for you:

  1. Seek recommendations. Ask trusted friends and colleagues which financial advisors they work with. They may be able to suggest a few good financial advisors for you to interview.
  2. Check professional credentials and ratings. Look at databases to see if your financial advisor's certification is in good standing. You can check with the FINRA BrokerCheck or the SEC Investment Professional Online Tool. You can also check the Better Business Bureau (BBB) for customer reviews.
  3. Ask questions of potential advisors. When you have a few advisors on your list to vet, ask what fees they charge, the minimum you need to invest to work with them and what they can share about their past performance.
  4. Set up a meeting. Meet with several potential financial advisors to see who you connect with the most, and beware of those who pressure you to make a rushed decision.

If you're not ready to work with a financial advisor one on one and are looking for a way to invest your money, you could take a DIY approach by working with a robo-advisor first. A robo-advisor is an investing platform that automatically invests money based on your risk tolerance and goals. Charles Schwab, Betterment and Wealthfront are companies that offer robo-advisor services.

The Bottom Line

A financial advisor is a broad term that can describe a lot of different people who offer money-related advice. Before taking advice from anyone, ask for credentials and understand their fiduciary responsibility. Also, ask how they make their money. This can help you make an informed decision on who the right person is to guide you through managing your lifelong savings.

No matter what type of financial advisor you choose, it's also important to empower yourself with knowledge that can help you make your own financial decisions. This includes understanding your credit health. You can get your credit report and credit score for free through Experian.

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