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What Is a Fiduciary?

A fiduciary is a person legally bound to put your best interests above their own. They appear in a range of business relationships, including corporate directors and shareholders, lawyers and clients, trustees and beneficiaries, and guardians and wards. 

🤔 Understanding fiduciaries

What is a financial fiduciary?

Fiduciaries are entities or individuals who manage personal, legal or financial choices for another person. Common fiduciary relationships include financial professionals like advisors and accountants, insurance agents, corporate officers, and executors. 

Some professions have laws defining the exact parameters and role of a person’s fiduciary responsibility. But, as a rule, fiduciaries must:

  • Put their clients’ best interests before their own
  • Disclose any potential conflicts of interest
  • Act in good faith
  • Provide all relevant facts and accurate, thorough advice
  • Avoid using a client’s assets for their own benefit, such as recommending ill-fitting products because they provide a kickback 

What legal responsibilities does a fiduciary have?

Someone who has a fiduciary duty has a legal responsibility to act solely for another’s interests. This is known as the duty of loyalty, which provides crucial guidance for professionals handling another’s affairs. 

Fiduciary designations also provide a route for someone to take legal action if their fiduciary abuses their power. In finance, this may look like an advisor making excessive trades, false statements, or acting “negligently” in their duties.  

What this means for you

Who has fiduciary duty?

The Investment Advisers Act of 1940 states that anyone in the business of handing out investment advice has a fiduciary duty to their clients. Additionally, any advisors registered with the SEC or state securities regulators (including robo-advisors) must act in a fiduciary capacity. 

But some financial professionals are exempt from this rule – namely, broker-dealers and stockbrokers. These individuals only have to meet FINRA’s suitability standards, which state that brokers only need a “reasonable belief” that an investment or action is “suitable” for the customer. Additionally, many generic “wealth managers” and “financial advisors” don’t have to act as fiduciaries. 

How do I know who is a good fiduciary?

Unfortunately, the law places the burden of verifying an advisor’s fiduciary status on clients. One way to ensure your advisor fits the bill is working with a certified financial planner (CFP), who must accept fiduciary status. You can also seek out investment advisors who are registered with the SEC or a state securities regulator. 

If you’re not sure where to start, you can use online databases to look up an advisor’s credentials. Both the National Association of Personal Financial Advisors (NAPFA) and the Certified Financial Planners Board offer these services. 

Working with a fiduciary doesn’t guarantee financial returns—or that your advisor won’t use your money to pad their pockets. But it does reduce the odds that you’ll run into a bad actor and gives you an avenue for recourse if your advisor breaches your trust. Plus, fiduciaries tend to be more transparent about your options, allowing you to make more informed decisions with your finances.

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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