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What is a Fiduciary? Here’s Why It Matters in Money Management

You may have heard the word “fiduciary” when searching for a financial advisor. This is an important term to understand, and we’ll break why it’s so critical to work with a fiduciary. But first, the dictionary definition: A fiduciary is an individual or organization that has a legal duty of care and loyalty to another person (or persons).

A fiduciary who manages money for another person is expected to act with the utmost honesty and integrity, making decisions that are in that person’s best interests. Bankers, attorneys, money managers, financial advisors, accountants, executors, board members, and corporate officers should have fiduciary responsibility. If they are and it can be proven they haven’t acted in the best interest of their customers, clients or shareholders, they can be held legally liable.

What is Expected of a Fiduciary?

When searching for a financial advisor, look for a fiduciary. Trust is crucially important in a relationship, and you deserve an advisor who is transparent and minimizes conflicts.

Fiduciary financial advisors must:

  • Put your best interests before their own, seeking the best prices and terms.
  • Act in good faith and provide you with all relevant facts.
  • Avoid conflicts of interests and disclose any potential conflicts of interest.
  • Do their best to ensure the advice they provide is accurate and thorough.
  • Avoid using your assets purely to benefit themselves, such as by purchasing securities for their own account before buying them for you.

Understanding Fiduciary Duties

A fiduciary’s responsibilities are both ethical and legal. When a party knowingly accepts the fiduciary duty, they are required to act in the best interest of the principal, the party whose assets they are representing. If someone has a fiduciary duty to you, he or she must act first and foremost in your financial interests. A fiduciary cannot recommend an investment that doesn’t benefit you or carries higher fees than a virtually identical investment.

On the contrary, non-fiduciaries may consider their own interests alongside yours and recommend investments that pay them the largest commissions — as long as the investment is considered generally suitable for your needs.

Recourse is another important consideration. If a fiduciary violates his or her duty, you have an avenue for legal action. If a non-fiduciary advisor knowingly sells you high-fee or inappropriate investments, you’ll face much greater difficulty proving legal wrongdoing.

Here are common examples of breaches of fiduciary duty:

  • Acting negligently
  • Making unauthorized trades
  • Account churning (making an excessive trades to generate commissions)
  • Misrepresentation (making a false statement about a security transaction)

How Do You Know if Your Financial Advisor is a Fiduciary?

Vet candidates carefully. Get to know any financial advisors you are considering and ask questions to ensure they are suitable for your needs. Here are good questions to ask.

1. Are you a fiduciary?
Only financial advisors who are fiduciaries are required by law to act in the best interests of their clients, both on retirement and other investment accounts.

2. Do you have an adequate investment in technology?
Many registered investment advisors (RIAs) haven’t made adequate investment in technology, such as basic financial planning advisors. You should seek an independent RIA who has the software to provide a transparent view of your entire financial life. Otherwise, how would he or she be able to provide you with holistic financial advice?

3. How are you compensated?
It can be tough to find out how an advisor or broker is compensated. Brokers can be incentivized by mutual fund incentives, lending products, and trading commissions. These costs are often buried in fine print, but they can really add up if you’re not careful.

Personal Capital was built around the fiduciary standard. We are – and always will be – a fiduciary for our clients. We promise to provide advice that is in our clients’ best interest, and because we are a Registered Investment Advisor (RIA), it is our legal obligation, as well.

Why It’s Important to Choose a Fiduciary Financial Advisor

A fiduciary advisor can give you greater peace of mind with your money. You’ll know they’re legally obligated to act in your best interests. By removing the incentives that underlie far too many high-fee and other proprietary products, and bypassing the people who push them, you’re more likely to end up with a strategy that is truly right for you.

Work with a Personal Capital Advisor

Since inception, Personal Capital has acted as a fiduciary. As a Registered Investment Advisor, we not only follow the fiduciary standard but embrace it as part of our mission to provide financial advice. Sign up for our free tools and schedule a free 30-minute portfolio review with an advisor from the comfort of your home.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

David Eckerly is the Senior Director of Product Marketing at Personal Capital. He has worked in financial services for more than 20 years, with roles in Client Service, Sales, Trading, Corporate Communications, and Marketing. He earned an MBA in Finance and Accounting from the Booth School of Business at the University of Chicago.
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