Fiduciary: A Fancy Word For Trustworthy

Webster’s defines fiduciary as “of, relating to, or involving a confidence or trust: as held or founded in trust or confidence; holding in trust.” The word trust appears three times in that twenty-word definition, telling us it all boils down to . . . well, trust.

Fiduciary is a crucial word to remember when you’re evaluating financial advisors.  A fiduciary is bound by law to act in your best interests at all times, even when your best interests are in conflict with the fiduciary’s financial interests.

So what does that have to do with financial advisors?  Plenty.  Never assume a financial advisor is a fiduciary.  In fact, unless your financial advisor is an attorney, a certified public accountant (CPA) or a registered investment advisor (RIA), chances are, he or she is not a fiduciary.  Only lawyers, CPAs and RIAs are automatically fiduciaries.

And why is that important? Imagine a financial advisor who gets a commission for convincing you to invest in certain funds, insurance policies or other financial products. Do you think that advisor will recommend what’s best for you 100% of the time, or will you sometimes be steered in the direction of those financial products that result in a tidy fee for the advisor?

A fiduciary, on the other hand, must disclose in writing any actual and potential conflicts of interest. Fiduciaries cannot receive any compensation from any third party that is contingent upon your purchase of any financial product. They are prohibited from being compensated for referring you to any other professional. They must thoroughly disclose exactly how they are compensated. And they must adhere to a professional Code of Ethics.

You can certainly choose to work with a financial advisor who has not taken the fiduciary oath. But if you want to be sure you can trust the person giving you financial advice, choose a fiduciary.