What is the Difference Between a Fiduciary and a Financial Advisor?

Finding the right person to help manage your investments can be confusing or even a little intimidating. There is a good reason for that - according to the Financial Industry Regulatory Authority (FINRA), there are over 100 financial professional designations. You may come across titles such as financial planner, financial advisor, financial consultant, and wealth manager. How do you know which one is best for you? 

Let’s start with some basic facts that will help guide your questions when searching for the right financial advisor. There are benefits and potential drawbacks to each, so it is important to be well informed as you begin your search for someone to guide you in your financial goals. 

The Fiduciary Standard and the Suitability Standard

The advice you receive from any planner will generally fall into two categories: the Fiduciary Standard or the Suitability Standard. 

• The Fiduciary Standard means your advisor must always recommend products and advice that are in your best interest, not their own. 
• The Suitability Standard means products must be suitable for your circumstances but gives the advisor the opportunity to recommend products that pay him/her the highest commission fee. 

Some brokerage firms may not clarify which standard they are working under since financial advisors can switch between the two standards. It is easy for clients to become confused and unfortunately, fall victim to higher fees and/or lower performance in their investment options if a planner is switching between standards. 

One way to determine if financial advice falls under the Fiduciary Standard is to look at the fee structure of your advisor. 

• Fee-based advisors can charge fees and commission on products they sell.
• Fee-only advisors do not receive fees or commissions from the products they sell. They are paid based on their advice.

CERTIFIED FINANCIAL PLANNERS™ and Registered Investment Advisors

When looking at titles and designations, these two are important.  CERTIFIED FINANCIAL PLANNERS™, or CFP®, are required to act under the Fiduciary Standard, only offering products and advice that are in your best interest, even if it is not the most beneficial to them personally.  

A CFP® must have at least a bachelor’s degree from an accredited college or university and 6,000 hours of financial planning experience. They must complete the CFP® educational program and pass a final examination. 

A Registered Investment Advisor, or RIA, is the other designation to look for, either for your advisor or their brokerage firm. The Investment Advisors Act of 1940 stipulates that RIAs have a fiduciary duty to only provide advice and recommendations that are in their clients’ best interest.

RIAs must register either with the Securities Exchange Commission (SEC) or their state’s securities board, depending on company size and financial services offered. They must have written policies and procedures that follow the Investment Advisors Act and are required to file reports with clients and the SEC or state security board. To qualify as an RIA, the advisor must pass the Series 65 examination or maintain a Series 7 and Series 66 with a broker-dealer firm. 

Why Choose a Fiduciary

A fiduciary’s advice must aim to maximize their client’s financial gains not their own compensation. They must disclose any potential conflicts of interests and always place their clients' best interests ahead of their own. If your financial advisor is not a fiduciary, then the advice you receive may not always be in your best interest. 

What is a Fiduciary Type Account? 

A fiduciary type account is fee-based. There are different types – some are managed by professional advisors who manage the day-to-day decisions of the account. Another type has an advisor who makes recommendations but must get approval from you before making changes. These options allow you to determine if you have the time and interest to be involved in decisions or if you prefer to spend your time doing other things, giving the management responsibility to a trusted advisor. 

Flat Fees vs. Reasonable Commissions

Many people searching for a financial planner may wonder why there are even options between a flat fee versus a commission as compensation for their advisor. Sometimes it is related to the experience of an advisor. For example, a new financial advisor must decide how they want to earn their compensation. Do they find multiple clients who are paying a flat monthly fee of $100 to make their base salary, or can they recommend a product with a reasonable 2% commission upfront so they earn a larger sum one-time? 

Some professionals, in finance and other industries, prefer a commission-based salary. If your financial planner has made a solid recommendation for you, then it can be perfectly acceptable to pay a reasonable commission fee. Based on your circumstances, you can decide if a monthly flat fee is more practical or if you would prefer to pay a one-time commission. 

One other consideration when deciding between flat fees vs. commissions is the level of service your advisor provides. On fee-based accounts, advisors need to keep clients happy month after month, for a long time, to retain them. This may increase the likelihood you will receive good service. On a commission-based account, an advisor may not be as incentivized to keep providing good service once they’ve been compensated. It’s a good idea to inquire about what services are included, such as regular phone calls and availability when you have questions.  

Elijah Heath, a CERTIFIED FINANCIAL PLANNER™ at Heath Wealth Management, explains, “Clients should be aware of “multi-hat advisors” because they can benefit a client. Selecting one singular type of advisor does not guarantee the best results. For example, a fee-based advisor may take good accounts and move them to another fee-based account even if it does not necessarily benefit the client. It is more important to ask about the Fiduciary Standard and understand costs and services involved in the advice.” 

Tax Implications

When working with a financial advisor, you should weigh taxes into all recommendations. CFP® Elijah Heath provides his clients with multiple investment options and works with a Certified Public Accountant, or CPA, to create a strategy. For example, a client may have had large financial losses years ago they have been carrying forward that may offset gains in making changes to their investment products. It is important to not create an unwelcome surprise with high, unexpected taxes. 

Choosing the Right Financial Professional 

As previously discussed, there are many terms for the types of financial advisors and planners you will come across. In order to choose the right professional for your circumstances, consider your goals and financial needs. There is a difference between needing someone to help you set up a budget, for example, versus long-term planning for things like college savings and retirement. 

Ask whether the financial planner is held to the Suitability or Fiduciary Standard. If they hold themselves to the Suitability Standards, their advice could be a little biased due to their compensation being linked to a commission paid on the product(s) they recommend.  In contrast, a planner who holds themselves to the Fiduciary Standard cannot accept commissions and will only charge a flat fee or a percentage of the assets. 

Changes for the Better

The financial industry is trying to clean itself up. It is very aware of the perceptions and confusion consumers face. At the beginning of 2020, the Securities Exchange Commission (SEC) created “Best Interest Standard” – known as Reg BI. While it is still very new, there is hope it will work to clean up the practice of heavy commissions that only meet the Suitability Standard in the industry. 

With a better understanding of the terms and designations used throughout the financial industry, you can alleviate your concerns about selecting the right financial planner for your circumstances. You can also review our list of the Top 10 Questions you should ask an advisor before hiring one.  

Call us to learn more, ask questions about your specific circumstances, and determine if we are the right fit for you. Our phone number is 813-556-7171. We can also be reached by email at Elijah.Heath@LPL.com.

Elijah Heath, CERTIFIED FINANCIAL PLANNER™ (CFP®), is a fiduciary with an ethical obligation to provide information, products, and services in your best interest, not what earns him the best fee or commission. Heath Wealth Management wants to be your advisor for life so you, your children, and grandchildren all benefit from the relationship.