You may have been watching television or driving down the road and heard a commercial with the words “a true fiduciary”, but do you know what that really means? Most people don’t understand the meaning of “fiduciary” and how it can affect you and your financial future.

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interest ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests.

A fiduciary’s responsibilities and duties are both ethical and legal. When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the principal, i.e. the client or party whose assets they are managing. This is what is known as a “prudent person standard of care,” a standard that originally stems from an 1830 court ruling. This formulation of the prudent-person rule required that a person acting as fiduciary was required to act first and foremost with the needs of beneficiaries in mind. Strict care must be taken to ensure no conflict of interest arises between the fiduciary and their principal.

The fiduciary is expected to manage the assets for the benefit of the other person, rather than for their own profit, and cannot benefit personally from their management of assets.

Financial advisors not acting as fiduciaries may operate under a less stringent standard called the suitability standard. Registered Investment Advisors (RIAs), and Certified Financial Planner (CFP) professionals are held to the higher fiduciary standard, while Registered Representatives, and brokers are held to the less stringent suitability standard.

Advisors who operate under a suitability standard have to choose investments that are appropriate based on the client’s circumstances, but do not have to put the clients’ best interests first.

For example, under the suitability standard, purchasing a low risk mutual fund for a conservative investor is perfectly acceptable even if that particular fund is very expensive and ultimately gives the advisor the biggest commission.

Even though there may be more cost effective alternatives out there, the advisor operating under a suitability standard does not have to present a better alternative to the client, since the higher fee option is suitable for the client based on their risk tolerance.

The client may be better off with a lower cost alternative, but a non-fiduciary advisor can recommend the fund that will provide them with the greatest payout.

Hiring a fiduciary advisor to manage your portfolio is one of the best ways to ensure you are receiving unbiased advice. When shopping around for a financial advisor, remember to ask whether or not they are a fiduciary, and how they are compensated.

This will help you better understand whether or not they are able to give you the caliber of unconflicted advice that you may be seeking. While not everyone feels inclined to work with a fiduciary advisor, asking questions and understanding that not all advisors are held to the same standard of financial advice is key to making the best choice for who you trust with your hard earned money.

Coach Peter J. D’Arruda and his fiduciary team here at Capital Financial always have your best interests in mind. Give them a call today to get started on a better path to your retirement.