5 Misconceptions About Fiduciaries


If you’re not in the financial industry, it’s impossible to know all of the terms or “lingo,” but some terms are worth learning. Having knowledge of what a fiduciary is will not only impress your friends at a party, but it will also help you understand what you should expect from your broker.

Key Takeaways

  • An investment fiduciary is anyone with legal responsibility for managing somebody else’s money, such as a member of the investment committee of a charity.
  • Registered investment advisors (RIAs) have a fiduciary duty to clients; broker-dealers just have to meet the less-stringent suitability standard, which doesn’t require putting the client’s interests ahead of their own.
  • Being a fiduciary, however, doesn’t always come with what people think it means. Here we examine five common myths about fiduciaries.

What Is a Fiduciary?

A fiduciary holds a responsibility that is considered the highest standard of care under the law. A fiduciary relationship involves two parties: the fiduciary and the client (or a group of clients), where the former has an obligation to put the client’s needs in front of their own.

Just as some countries have laws requiring the captain to be the last person to leave a ship in distress, fiduciaries have to save your money before they save their own. If they don’t, they can face civil and even criminal penalties under the law.

Although that should give you a sense of relief about the person handling your money, you shouldn’t let too much of your guard down. Although fiduciary responsibilities are designed to protect your money, there are some facts that you should know about fiduciaries in order to protect yourself.

1) Everybody Is a Fiduciary.

Just because someone is a financial advisor doesn’t mean they are a fiduciary. There are two standards of care that apply to money managers: the fiduciary standard and the suitability standard. The latter standard requires that a financial advisor make recommendations that are suitable for your needs.

It is not required for fiduciaries to put your needs in front of their own (or their company’s). If you work with advisors from one of the major broker-dealers, they are likely operating under the suitability standard.

If you would like to know which standard your advisor is bound to, then you should ask them.

2) There Is Always a Test or License.

Fiduciaries gain the title by actions, not education. Some fiduciaries are Certified Financial Planners who went through a grueling process to gain the certification. Others may have taken a test to become a registered investment advisor. Others, like those who serve on an investment committee, may be fiduciaries because of their role on the committee.

Make sure to ask about your advisors’ education and background, even if they are fiduciaries.

3) Fiduciary Law is Easy to Enforce.

It’s true that a fiduciary who breaches their duty may face tough civil and criminal penalties, but proving that a fiduciary breached their responsibility can be difficult to prove in court. If a fiduciary believes that they were acting in the best interest of their client when placing that client in an investment that later resulted in great losses, that isn’t necessarily a breach of the standard. Some cases have enough factual basis to take to trial, but trying to prove that somebody had ill will toward a client or group of investors is difficult.

4) A Fiduciary Guarantees a Profit.

Under industry rules, no financial advisor can guarantee that you will profit from any investment. All investments come with risk and if you don’t see the results you were hoping for, that doesn’t mean that your advisor breached their fiduciary duties.

5) Fiduciaries Are Always Honest.

Certainly, a large percentage of financial advisors are in the business to help you reach your goals and they wouldn’t knowingly advise you to take actions contrary to your best interests. Being a fiduciary means that you uphold your client’s interest first and are not self-serving. Still, some people will always be bad actors and behave in ways that violate fiduciary conduct.

Every industry has a certain amount of people who should be avoided regardless of their title. Research anybody who will help you make decisions regarding your money.

The Bottom Line

Expect a high standard of care from your fiduciary, but never let your guard down. Nobody cares more about your money than you do. You don’t need to be an expert, but you should have enough knowledge to be able to make informed decisions about all of your financial affairs.

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