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

What Is a Fiduciary?

Fiduciaries are professionals who manage property or money for other parties. Legally, they're required to operate in the client's best interest—not their own.

They also must manage the money and property they're in charge of carefully, keep comprehensive records, and ensure their money and property are separate from their clients'.

Overall, the term "fiduciary" is broad and can include a wide array of jobs in the financial, insurance and employment space. Examples of fiduciaries include:

• Some certified financial planners, chartered financial analysts and registered investment advisors
• Employee retirement and benefit coordinators
• Guardians or conservators of property
• Social Security representatives
• Trustees, agents, nominees, custodians or guardians of accounts for minors
• Those who hold powers of attorney over others' financial accounts
• Representatives in charge of real estate and escrow accounts
• Third-party brokers who make deposits on a client's behalf
• Investment advisors

Many types of professionals can be fiduciaries, and some designations and certifications require a fiduciary duty. For example, an investment advisor must be registered with the state or Securities and Exchange Commission (SEC) and is required to uphold the fiduciary standard. The Certified Financial Planner Board of Standards also requires that certified financial planners operate as fiduciaries as part of its code of conduct.

What Is a Financial Advisor?

A financial advisor is, broadly, any financial professional who offers advice on how to manage your money or some other financial aspect of your life.

Common 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.
• Registered investment advisors (RIAs): These are professionals who provide investment advice and are registered with the SEC or their state's securities regulator.
• National Social Security advisors (NSSAs): NSSAs can help seniors make decisions regarding their Social Security benefits.

Financial advisors can also specialize, such as in student loans, senior needs, taxes, insurance and other facets of your finances. The certifications required for these specialties can vary.

Fiduciary vs. Financial Advisor

Fiduciaries and financial advisors both provide some sort of financial- or asset-related service to clients, and in some cases, a professional can be both a fiduciary and a financial advisor at the same time.

But not always. Fiduciaries are legally required to act in their client's best interest and to keep their money and property separate from other assets they manage. Only financial advisors whose designation requires a fiduciary duty—like certified financial planners, for instance—can say the same.

This distinction also means that fiduciary and financial advisor fee structures vary too. Fiduciaries will usually charge advisory fees—flat rates, hourly rates or per-service fees, for example. They don't earn commissions or kickbacks on the products they recommend.

Financial advisors, on the other hand, can and often do accept commissions. This fee structure could pose a conflict of interest and encourage advisors to steer clients toward certain products.

How to Tell if Your Financial Advisor Is a Fiduciary

Determining whether a financial advisor is a fiduciary can be tricky.

To see if an advisor you're considering is a fiduciary, you can:

• Ask the advisor directly. Be sure to inquire about any products they might earn commissions on, too.
• Look at their fee structure. If they are fee-only, they're more likely to be a fiduciary. If they're commission-only or fee-based (meaning they're paid via a combination of fees and commissions), they might not be.
• Check their credentials and SEC registration. Many credentials and designations require a fiduciary duty. You can check to see if the professional is registered with the SEC. If they are registered, they are a fiduciary.

Learn more: What to Know Before Hiring a Financial Adviser

Should You Work With a Fiduciary or a Financial Advisor?

Whether you should seek out a financial advisor or fiduciary depends on your goals and preferences. Here's what to think about when deciding what type of professional you should work with.

When to Consider Working With a Fiduciary

A fiduciary can be a good option if you want to be sure there are no conflicts of interest involved.

You may want to use one when:

• You're planning for retirement. Your retirement strategy will likely include significant amounts of money and investments. Choosing a fiduciary will ensure you aren't steered toward certain investments due to the commission they offer.
• You need help managing a large inheritance or windfall. With lots of money on the line, you may want a financial professional who is legally bound to use those funds carefully and only in your best interest.
• You're making a big investment decision. Non-fiduciaries may recommend investment products that are best for their pocketbooks and not your investing goals.

When to Consider Working With a Financial Advisor

Working with a fiduciary will give you the most peace of mind that you're receiving guidance free from monetary influence, but there are some cases in which using a general financial advisor may suffice.

You might consider a non-fiduciary financial advisor when:

• You need basic budgeting help. Budgetary guidance won't typically include product recommendations, so you may be able to avoid potential conflicts of interest.
• You're saving for small, short-term financial goals. While a fiduciary is likely best if you're dealing with large amounts of money or investments, a financial advisor may be enough for smaller sums and goals.
• You need product-focused advice. If you're simply seeking guidance on a particular product that an advisor specializes in, they may be your best option.
• You want the lowest upfront cost. Financial advisors who operate on a commission basis may have lower initial costs than fiduciaries. Just make sure you consider the costs you might incur if they steer you toward ill-fitting investments too.

How to Choose a Financial Advisor

As you can see, not all financial advisors are created equal. So if you plan to work with one, choosing the right person is critical.

To find the right financial advisor, you should:

• 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.
• Check professional credentials and ratings. Check to see if your financial advisor's certification is in good standing. You can check with the FINRA BrokerCheck, the CFP Board's verify a professional tool or the SEC Investment Professional Online Tool. You can also check the Better Business Bureau (BBB) for customer reviews.
• Ask questions. When you have a few advisors on your short list, ask what fees they charge, the minimum assets you need to work with them and what they can share about their past performance. You should also ask if they have a fiduciary duty if that's important to you.
• 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 just a few companies that offer robo-advisor services.

The Bottom Line

A financial advisor is a broad term that can describe many professionals 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 guide you toward the right person to advise you on your financial decisions.

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 FICO^® Score^Θ for free through Experian, then learn how to improve your credit.