In This Article
This article is educational. It is not investment, tax, or legal advice, and it is not a recommendation for any reader's specific situation. The point of this piece is to give you a clean working knowledge of three standards of advice so you can ask the right questions of whoever is sitting across from you.
A note before we start. I am writing about the word “fiduciary” because I think most people who hear it have been told it means something it does not, and that misunderstanding costs them money. I am not claiming the title for myself. I operate under a Best Interest obligation, which I will define below.
When someone tells you their financial advisor is a fiduciary, you are supposed to relax. The word is doing a lot of work in financial marketing. It signals trust. It signals that the person on the other side of the table is legally required to put your interests ahead of their own. It signals that you have made the safer choice.
Sometimes that is true. Often it is not, because the word is used loosely, the legal definition is narrower than most people realize, and there are two other standards of advice that almost everyone confuses with fiduciary duty. Once you can tell the three apart, you will ask better questions, and you will be much harder to sell something that does not belong in your plan.
This is not a long piece. The distinctions are simple once you see them.
The Three Standards of Financial Advice in Plain Language
There are three standards that govern how a financial professional is allowed to advise you. From most strict to least strict, they are: the fiduciary standard, the Best Interest standard, and the suitability standard. The fiduciary standard is a legal duty. The Best Interest standard is a regulatory rule. The suitability standard is the legal floor. Most consumers think the people advising them are fiduciaries. Most are not.
The fiduciary standard is the strictest of the three. A fiduciary is legally required to act in the client's best interest, to disclose conflicts of interest in writing, to recommend the lowest-cost option among similar products, and to put the client's interests above their own in every decision. In financial services, the most common fiduciaries are Registered Investment Advisers, or RIAs, who are regulated by the Securities and Exchange Commission or by state securities regulators.
The Best Interest standard sits one level below. It was created by the SEC in 2019 under what is called Regulation Best Interest, often shortened to “Reg BI.” It applies to broker-dealers and their registered representatives. The standard requires the broker to act in the customer's best interest at the time a recommendation is made, but it allows for a broader range of conduct than the fiduciary standard. A broker can be paid through commissions on the products they recommend. They are required to disclose those commissions, but they are not required to recommend the lowest-cost option, and the obligation only applies at the moment of recommendation, not on an ongoing basis.
The suitability standard is the bottom rung. It is the standard most insurance agents and many financial salespeople have historically operated under. Under suitability, the recommendation only has to be suitable for the client given their stated goals, age, income, and risk tolerance. It does not have to be the best option. It does not have to be the lowest-cost option. It does not have to be in the client's interest at all, as long as it is not obviously unsuitable. A 70-year-old retiree being sold a high-commission variable annuity meets the suitability standard if the product is technically appropriate for someone of that age and risk profile, even if a lower-cost option exists that would serve them better.
Why the Word “Fiduciary” Gets Used Loosely
The word “fiduciary" is not protected language in the way that “doctor" or "attorney" is protected. There is no single national licensing body that polices its use. As a result, financial professionals who are not legally fiduciaries sometimes use the word to describe their intent or philosophy rather than their legal status. This is technically not fraud, but it can mislead consumers who hear the word and assume it means the legal standard.
The clearest test is to ask the person directly: “Are you legally a fiduciary at all times when you are advising me, and will you state that in writing?”
If the answer is yes, ask them to identify the regulatory body they are registered with and the legal authority that imposes the duty. Most legitimate fiduciaries are happy to answer this question. They are usually RIAs registered with the SEC or a state regulator, and they will provide what is called a Form ADV, which is the disclosure document fiduciaries are required to give clients.
If the answer is no, or if the answer involves the words “in the spirit of,” “philosophically,” “operate as a,” or “consider myself a,” the person is not a legal fiduciary. They may still be giving you good advice. But the word does not mean what you have been told it means.
What the Best Interest Standard Actually Looks Like in Practice
The Best Interest standard, when applied honestly, requires the advisor to recommend what is right for the client even when it pays the advisor less. In practice, this means refusing commissions that would bias a recommendation, declining to sell products that do not fit the client's situation, and disclosing every fee and conflict before the client commits to anything. It is the rule the practice operates under, not a marketing phrase.
The honest version of Best Interest looks like this. The advisor does not work on commission overrides that would push them toward higher-paying products. The advisor will not sell something they would not put their own family in. The advisor explains every fee, every commission, every spread, and every conflict before any recommendation is made. The advisor says so, in writing, in the engagement documents.
That is the working definition I operate under. It is stricter than what the SEC technically requires of broker-dealers under Reg BI, because I have decided it has to be. The legal Best Interest standard allows a lot of discretion the practical Best Interest standard does not.
I am not a Registered Investment Adviser yet. I am working toward the Series 65 designation that would let me become one. Until that designation is in hand, I cannot legally call myself a fiduciary, and I will not. What I can do is operate at the highest practical standard I am allowed to operate at as an income planner and physical gold and silver broker, and I can be transparent with you about what that looks like.
What This Means When You Are Looking for Advice
When you are evaluating a financial professional, the question is not just whether they call themselves a fiduciary. The question is what standard they actually operate under, what conflicts of interest they have, how they are paid, and whether they will tell you all of that in writing before any recommendation is made.
The five questions to ask, in order:
What standard of advice do you operate under?
A fiduciary standard, the Best Interest standard, the suitability standard, or some combination depending on the type of recommendation? You want a specific answer. “I always act in your best interest” is a value statement. The answer you want is a regulatory category.
How are you paid?
Commission on the products recommended? Asset-based fees? Flat fees? Hourly? Some combination? A clear answer should come quickly. Hesitation on this question is itself an answer.
What are your conflicts of interest, and will you disclose them in writing before I commit to anything?
If the advisor is a Registered Investment Adviser, the disclosure document is called a Form ADV and they are required to provide it. If they are not an RIA, they should still be willing to put their conflicts in writing. An advisor who will not is telling you something.
Will you recommend the lowest-cost option among similar products, or will you recommend the option that pays you the most?
The honest answer is sometimes neither. Sometimes the right product is not the cheapest. But the advisor should be able to tell you why a higher-cost option is right when they recommend one.
If I find a comparable product elsewhere for less, will you tell me?
This question filters out a lot of advisors very quickly.
A Final Thought
The word “fiduciary" was supposed to be a shortcut. A consumer hears it, the consumer relaxes, the consumer assumes the harder questions are no longer necessary. That is exactly what makes it useful as a marketing word and exactly what makes it dangerous as a substitute for asking what a person actually does.
The harder path is to ask the five questions above and listen to the answers carefully. It takes ten minutes. It will tell you more about the person across the table than any title or designation will.
The standard I operate under is Best Interest obligation, applied at the highest practical level. The standard I am working toward is fiduciary, formally, when the Series 65 is in hand. Until then, I will tell you exactly what I do and what I do not, and I will put it in writing.
If any of this raises questions about your own situation, I would be glad to talk.
Important Note
The content above is educational and does not constitute investment, tax, or legal advice, or a recommendation regarding any specific product, service, or advisor. References to standards of advice are general descriptions and do not address the rules that apply to any individual reader's situation. Decisions about financial professionals, retirement accounts, and the products you hold should be made in consultation with qualified advisors familiar with your specific circumstances. Deric Ned is licensed by the State of California to sell annuities. He is not a Registered Investment Adviser.
