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What Is a Fiduciary?

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If you’ve searched for or worked with a financial advisor before, you may have heard the word “fiduciary” tossed around. Maybe the person you consulted with was a fiduciary themselves. 

Fiduciary is one of those words that can sound complicated and if you’re fuzzy on what it means exactly, know that you’re not alone. 

A fiduciary is someone who is legally and ethically obligated to act in the best interest of their client

Only 21% of Americans knew the difference between a fiduciary financial advisor and a non-fiduciary advisor, according to a 2017 survey by Financial Engines, an investment advisor.

That being said, getting up to speed about who fiduciaries are and what they do won’t take longer than a few minutes (we promise!). So let’s jump into the details of what fiduciaries do and how they can help you reach your money goals. 

Fiduciary definition

While the word may sound complicated, the definition of a fiduciary is actually pretty straightforward. Put simply, a fiduciary is someone who is legally and ethically obligated to act in the best interest of their client. 

In the context of your finances, that means if you have a financial advisor who’s a fiduciary, they have a legal responsibility to give you advice that is intended to be the best fit for your money goals and needs. If they don’t uphold this obligation, they can potentially face legal consequences. Sounds pretty great, right?

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Now you might be wondering, “Don’t all advisors avoid conflicts of interest and have to disclose any potential conflicts to clients?” The truth is, not necessarily. It depends on if they’re held to fiduciary duties or not. It’s also worth noting that some professionals might be held to a fiduciary duty in certain areas of responsibility, but not all. 

When swimming in these sometimes murky waters, it might be helpful to know that all investment advisors registered with the Securities and Exchange Commission (SEC) are required to act as fiduciaries.

Fiduciary duties

Now that you know fiduciaries are legally and ethically required to act in the best interest of their clients, we’ll jump into what that means in a little bit more depth. Fiduciary duties spell out how fiduciaries are expected to uphold the fiduciary rule. These duties include, but aren’t limited to:

  • Put the best interest of clients ahead of their own, including seeking the best terms and prices
  • Avoid conflicts of interest and fully disclose any conflicts of interest that exist as soon as possible. 
  • Provide all relevant facts to clients and act in good faith
  • To the best of their abilities, ensure the advice they provide is accurate and complete
  • Avoid using a client’s assets for their own benefit or for the benefit of other clients

Fiduciary standard versus suitability standard

Some non-fiduciary financial professionals could be held to what is called the suitability standard. Broker-dealers, stock brokers, and insurance agents typically fall in this “suitability” category.

The differences between a fiduciary advisor and an advisor held to the suitability standard can certainly get a little confusing. 

The suitability standard says that the advisor is required to make suitable recommendations based on the needs and preferences of the client. For a recommendation to be “suitable,” the advisor only needs to have a reasonable belief that the recommendation will benefit their client. 

To determine if a recommendation is suitable, these advisors must consider the client’s goals, risk tolerance, and their personal financial situation. These advisors should also avoid incurring any excessive costs or making excessive trades. The disclosure of conflicts of interest also might be a little less strict with the suitability standard.

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The specific nuances of differences between a fiduciary advisor and an advisor held to the suitability standard can certainly get a little confusing. 

At the end of the day, though, as the client you can (and likely should!) ask your advisor questions about the recommendations they make, so that you can better understand how your money is being managed.

This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss.