In short, a fiduciary is defined as someone or something that you can trust — typically with your money. When a fiduciary makes a quick financial decision or long-term budget plan on your behalf, he or she doing so in your best interest, not his (or her) own — sometimes contrary to his own best interests.

It’s all about good faith, honesty, and transparency. A duty of care. It’s a standard of conduct many professionals in the corporate, financial, and legal world try to adhere to.

But the term fiduciary can be abused by greedy liars and criminals who claim and often violate this mantle of deep trust between the fiduciary and the client (you).

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Examples of What a Fiduciary Is

Many financial advisers (though not all), corporate shareholder officers, attorneys, real estate agents, and trustees are fiduciaries. Legal entities like banks are also fiduciaries, although some don’t act like them.

The most common example of a fiduciary is a trustee of a trust, which is a legal document that people and their lawyers create to distribute their money and property to their kids, favorite charities, and other beneficiaries.

The trustee’s primary responsibility is to work with the trust beneficiaries to ensure the terms of the trust are carried out exactly as written.

Every fiduciary is entrusted with the power and responsibility to act on another’s behalf.

But let’s keep in mind that when we talk about fiduciaries, we’re usually talking about financial advisers. The folks who help us invest, budget, and plan. Call them loyal financial coaches and mentors. Sadly, not all financial advisers fall into this group.

Why Aren’t All Financial Advisers Fiduciaries?

The term financial adviser is a broad tent. Advisers come in all sorts of names and descriptions: brokers (formerly known as stockbrokers), certified financial planners, insurance agents, wealth managers, and registered investment advisers. But the professionals holding these titles don’t all follow the same set of rules when dealing with their clients.

Some advisers only care about themselves and about making money off you, while others devote themselves to making you their top priority.

Financial advisers who can claim to be real fiduciaries are certified financial planners (CFPs) and registered investment advisers (RIAs). Their fiduciary status is underwritten by the Certified Financial Planner Board of Standards and the Securities and Exchange Commission, respectively.

Brokers (or broker-dealers), insurance agents, and any other peddlers of investment advice or products are not actual fiduciaries, although some of them claim to be.

For example, I have an old childhood friend who’s a big-shot broker-dealer. He’s quick to note he always acts in his clients' best interests and doesn’t need any government rule or regulation to dictate how he should treat his clients.

He forgets to mention that federal regulators have questioned him in five different cases about whether he put his clients’ interests first when he sold them investment products.

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What’s the Government Doing to Make All Advisers Fiduciaries?

The concept of acting in your client’s best interest has been in use for decades. However, the meaning and message of a true fiduciary got a major boost in 2016.

That’s when the Department of Labor (or DOL) issued a ruling requiring all broker-dealers, insurance agents, and other financial professionals to adhere to the 1940 fiduciary standard when offering advice on their clients’ retirement accounts. This standard requires you to place your clients’ interests ahead of your own.

The new rule set off a huge debate within the financial-advisory community. It exposed and sorted the real fiduciaries from the phony ones.

The investing public got an earful about pervasive conflicts of interest. For instance, some advisers cheat their clients by pressuring them to buy certain financial products in which an adviser pockets a seller’s commission from the product’s maker.

The debate also highlighted how advisers are compensated. Fiduciaries like CFPs and RIAs charge their clients a flat fee, while brokers and insurance agents receive commissions for selling.

The 2016 rule was the DOL’s response to the thousands of complaints from investors, mainly the elderly. Many of them, under the assumption that their brokers would always act in the best interests, bought costly, risky, and eventually detrimental investment products that they never really understood, but that their brokers had recommended.

The investing public is wise to the fiduciary divide, and younger investors are increasingly seeking out fiduciary advisers.

The advisers, in turn, are using the fiduciary standard as an effective marketing tool to win new clients.

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What Is the Fiduciary Standard?

When President Franklin Roosevelt signed the Investment Advisers Act into law in 1940, not only were RIAs required to always act in their clients’ best interests, but they also had to follow several more mandates.

For example, any financial advice or guidance must be accurate, sound, and free from conflicts of interest. Plus, fiduciaries must disclose any potential conflicts of interest to their clients.

When you work with a fiduciary adviser, you give her discretionary authority over your investment portfolio. She can buy and sell stocks on your behalf without needing your approval. Fiduciaries must do this in the most cost-efficient manner possible.

The Security and Exchange Commission (or SEC) — the federal agency that oversees RIAs as fiduciaries — clearly warns these advisers that departing from this could constitute fraud.

The SEC punishes violators with lifetime disbarments and hefty fines, among other penalties.

But unfortunately, the non-fiduciary crowd isn’t under SEC oversight. The Financial Industry Regulatory Authority, or FINRA, regulates broker-dealers and simply exists to impose penalties and sanctions when a broker or his firm rips a client off (e.g., sells the client an “unsuitable” investment product).

As a result, brokers, insurance agents, and other non-fiduciary advisers operate under the “suitability standard,” which says they can only recommend investments products that are suitable for their clients.

Why the Fiduciary Standard Trumps the Suitability Standard 

Under the much weaker suitability standard, brokers and other financial advisers can still put their own needs and interests before those of their clients.

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At the heart of this are the commissions that brokers, and other non-fiduciaries receive when they sell an investment product like an annuity or mutual fund.

They may receive the commission from their firm or from the manufacturer of the investment product.

Brokers and other non-fiduciaries don’t care if you end up paying more for a costly investment product that earns them a commission. They don’t care if they have a conflict of interest with that product.

Their rationale is that the product could produce market returns that meet their client’s investing goals without exposing the client to unnecessary investment risk. If brokers are making money for their clients, who cares if they pay a little extra for it?

Meanwhile, fiduciaries would never give clients conflicting recommendations.

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Nobody’s Perfect

I don’t know why anyone would allow a non-fiduciary to handle their money and make investment decisions on their behalf. My family currently works with a CFP who also happens to be an RIA. We moved to her from a large brokerage firm that we felt was putting its own interests ahead of ours.

That said, fiduciaries aren’t perfect — they’re human.

They make mistakes. One RIA cost a friend of mine tens of thousands of dollars in a losing stock trade. And sadly, some fiduciaries turn out to be psychopaths. Remember Bernie Madoff, the Wall Street guru who defrauded his clients in a $68 billion Ponzi scheme in 2008? He was an RIA.

His case is a telling reminder that waving the fiduciary banner doesn’t guarantee a financial adviser’s competence and honesty.

But again, if you want to work with an adviser, going with a fiduciary is a smart place to start.