What Is a Fiduciary and Why Does It Matter?

Corey —  February 11, 2010

       A fiduciary is a person in a position of trust who obligates himself to always act in the best interests of those who trust him. For example, the trustee of a trust is considered a fiduciary and must always act in the best interests of the trust’s beneficiaries. Fiduciaries are legally required to act in the best interests of those they’re serving, and they can never put their own interests first.

Why Does It Matter?

       So why should you care what (or who) a fiduciary is? In the financial world, there are two types of advisors:

  1. Those who are fiduciaries.

  3. Those who are not.

       If you understand what a fiduciary is, you’ll see that advisors who are fiduciaries are required to do what’s best for you. Advisors who are not fiduciaries are not held to such a standard. It’s perfectly legal for them to put their own interests first – to act in a way that might not provide the best benefits to you. Obviously, you want to use a fiduciary advisor whenever possible because of their legal responsibility to you.

       There are very clear guidelines on who is considered a fiduciary in the financial world and who is not. The following people are NOT considered fiduciaries:

  • Stock Brokers
  • Insurance Agents
  • Real Estate Agents acting on the other party’s behalf (This is common when you are buying, as most real estate agents are acting on behalf of the seller.)

       “Advisors” in this group do not represent you. They represent themselves, their company, or someone else. They have no legal responsibility to act in your best interest. They are simply not permitted to commit fraud or provide you with “unsuitable” recommendations. But the “unsuitable” standard is very broad and difficult to impose.

       On the other hand, people in these groups are considered fiduciaries:

  • Registered Investment Advisers (RIAs) or Investment Adviser Representatives (IARs)
  • Insurance Brokers
  • Real Estate Agents acting on your behalf
  • CPAs
  • Attorneys

       Advisors in this group are legally required to act and advise you only for your benefit and interests. They can never act in a way that is contrary to what is best for you. They must act with undivided loyalty to you. If they fail to do so, you are entitled to legal action against them. It’s not enough for them to just provide “suitable” recommendations. They must try their hardest to provide you with the best advice possible.

       Let’s use a simple example. If you go to a stock broker, the broker can recommend you invest in Fund A (as long as it’s “suitable”) even though Fund B is better for you. Why would he do this? Probably because Fund A will give him a higher commission.

       Now let’s say you go to a Registered Investment Adviser (or an Investment Advisor Representative – someone who works for an RIA). Because RIAs have a fiduciary duty to their clients, they’ll always be required to recommend you invest in Fund B since it’s your best option. RIAs can’t receive commissions or do anything that’s not in their client’s best interests. So who do you want to get your advice from? The stock broker or the RIA?

       It’s quite clear that fiduciaries are held to a much higher standard than non-fiduciaries. Whenever possible, you should seek to obtain advice from people who are held to a fiduciary standard. Ask your advisors if they are fiduciaries. Ask them if they are required to always act in your best interests. They are required to answer truthfully, and you should be wary of those who cannot answer with a confident and resounding “yes”.

       Have you ever heard of the term “fiduciary” before? Is there any aspect of the fiduciary duty/standard you’re not clear on? Let me know in the comments, and I’ll do my best to answer your questions!



Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

4 responses to What Is a Fiduciary and Why Does It Matter?

  1. Doesn’t it get even more confusing for the consumer when an advisor works for a parent company that owns both a broker-dealer and an RIA?!? Moreover, I’m seeing more and more CPAs who go out and get insurance licensed to generate supplemental income as captive agents…or attorneys who regularly up-sell to more expensive trust packages when they aren’t really necessary. There is no clear line in the sand that is for sure.

  2. Great point, Eric! It can get extremely confusing. If your advisor (financial, CPA, or attorney) is acting in multiple capacities (like the CPA selling insurance), then you have to stay on top of him and ask if he’s acting in a fiduciary capacity for each transaction. I wish it were more clear cut, but it’s not.

    So consumers should take that as a cue to be on their guard at all times. Be careful whom you trust. Ask plenty of questions. Don’t be afraid to ask your advisor if he’s putting your best interests first and get it in writing.

  3. I never realized that there is a clear delineation between a fiduciary and advisor; though, it makes perfect sense. The problem that I see is determining whether or not a fiduciary is actually acting in your best interest. For example, the trustee of a trust could literally take years to slow create a personal advantage through methods such as undue influence that would essentially go unseen and be very difficult to later prove.

  4. Thanks for taking the time to comment, Adam! It’s always great to see new people comment on the site.

    You’re right that it can be difficult to tell if a fiduciary is acting in your best interest. I think it’s important to remember something J.D. Roth at Get Rich Slowly says often, “No one cares more about your money than you.” You have to take the responsibility to keep on top of your advisors/fiduciaries to make sure they’re doing what they should. This requires you to become educated as well. You don’t have to know everything they do or do everything for yourself, but you should learn enough to know when you’re being taken for a ride.