What is a fiduciary?

There are a lot of terms and titles used to describe financial advisors, and it can be difficult to keep track of their various meanings. One term you may hear is fiduciary or fiduciary standard. But what do those words mean?

A fiduciary manages another person’s assets and is legally and ethically obligated to act in that person’s best interests. A financial advisor acting as a fiduciary is thus committed to making decisions that best serve their client, even if it means reduced or no compensation for the advisor. Under the fiduciary standard, advisors must avoid any activities, interests or relationships that might interfere with making decisions in the best interest of the client. In essence, a fiduciary must operate with full transparency. Additionally, a fiduciary has a “duty to care” and must continually monitor not only a client’s investments, but also their changing financial situation.

It’s important to note that not all financial advisors, or other individuals you may trust with your finances, are fiduciaries.

For example, broker-dealers and insurance agents currently use the suitability standard. The suitability standard is far less stringent than the fiduciary standard in that it states that an investment choice should be merely applicable to that client, although not necessarily the best fit for that individual circumstance. A broker following the suitability standard is free to invest a client’s assets in a way that generates the highest commissions without disclosing such to the client. In the same situation, an advisor under the fiduciary standard is required to invest the assets in a way that makes the most sense given the client’s age, risk tolerance, and investment goals, regardless of any compensation to the advisor.

When seeking out financial advice, it is important to keep these distinctions in mind. You want to be sure that the person giving you advice in acting in your best interest. At Elm3 Financial Group, every employee follows a strict Code of Ethics that outlines our fiduciary duty to our clients.