Choosing a financial planner is an important decision. You are entrusting someone with your goals, financial security, and peace of mind. Although all advisors share the same job title, their standards and legal requirements can be very different.
Some financial planners are legally required to act in your best interest. They are called fiduciaries. Other planners are required to recommend/sell “suitable” products to you (not necessarily the best). And to make it even trickier, some planners switch between both of these throughout their relationship with you.
Finding out which type of planner you are talking to can be difficult; you won’t see an advisor advertising their suitability standard. So, we recommend asking these questions to find out if you’re talking to a true fiduciary.
Executive Summary: Is Your Advisor Truly a Fiduciary?
Not all financial advisors are legally required to put your interests first. While fiduciaries must act in your best interest 100% of the time, others only follow a “suitability standard,” allowing them to recommend products that earn them higher commissions.
This guide provides five essential questions to help you uncover an advisor’s true loyalties. You’ll learn how to decode “fee-only” vs. “fee-based” compensation, identify hidden investment costs, and verify an advisor’s regulatory record. Use these transparency benchmarks to ensure your financial partner is working for your goals—not a sales quota.
“How are you compensated?”
Fiduciary response: “I am a fee-only advisor and charge a percentage of the assets that I manage for you. I don’t receive income from any other source and I do not accept any commissions.”
Advisors under the suitability standard often receive commissions and have a complex web of ways that they can earn money. They may earn money by selling certain products or companies. Also, watch if they say they are fee-based. This sounds very similar to “fee-only,” but it actually means they charge a fee and also can accept commissions.
“What are the total costs I will have to pay?”
Fiduciary response: “The two costs you will have to pay are my 1% fee and the cost of the investments themselves, which I do not receive any income from. We use low-cost funds that cost 0.1% or less.”
Other advisors may charge a commission every time you buy and sell an investment and may recommend funds with high costs, because they make more money on them. These planners may also be very vague about the expenses, and you won’t truly know exactly all the costs involved.
“What is your investment philosophy?”
Fiduciary response: Fiduciary advisors will discuss having the proper asset allocation for you and your goals. They often believe in passive investing, diversification, and using low-cost funds.
Other advisors may recommend strategies that require specific products or high-fee investments.
“Will you always act in a fiduciary capacity?”
Fiduciary response: “I will act in fiduciary capacity 100% of the time.”
Other advisors will try to dodge the question or simply say they are a fiduciary and leave out that they may also act under the suitability standard at times. “Hybrid” advisors do not act as a fiduciary 100% of the time.
“How can I check your background?”
Fiduciary response: You can look up my name on the SEC’s Investment Adviser Public Disclosure (IAPD) website. It will show you my background and regulatory record.”
Fee-only fiduciaries will only show up on the SEC’s website. Other advisers will be on FINRA’s website, or on both the FINRA and SEC websites if they are the “hybrid” advisors.
If in Doubt, Ask
Don’t be afraid to question your financial planner. Your advisor shouldn’t get defensive or answer you vaguely, especially regarding how they get paid. It’s your money, so make sure you are comfortable with the advisor you’re working with.
Looking for a fiduciary financial planner that you can trust? Reach out to us. We don’t have an issue sharing our simple pricing model, so you know exactly what you are agreeing to.
Frequently Asked Questions (FAQ)
1. What is the main difference between a fiduciary and a traditional financial advisor?
A fiduciary is legally bound to act in your best interest above their own or their firm’s. Other advisors may only be held to the “suitability standard,” meaning they can recommend products that are “okay” for you but might pay them a higher commission than a better, lower-cost alternative.
2. What is the difference between “fee-only” and “fee-based” compensation?
These terms sound similar but are very different:
-
Fee-only: The advisor is paid directly by you and accepts no commissions or kickbacks from product providers. This is the gold standard for reducing conflicts of interest.
-
Fee-based: The advisor charges you a fee but can also earn commissions from selling specific financial products, creating a potential conflict of interest.
3. Why should I ask about an advisor’s investment philosophy?
Fiduciary advisors typically lean toward passive investing and low-cost funds to keep more money in your pocket. If an advisor recommends complex, high-fee strategies, they may be operating under the suitability standard rather than acting in your absolute best interest.
4. Can an advisor be a “part-time” fiduciary?
Yes. Some “hybrid” advisors switch hats. They might act as a fiduciary when managing your portfolio but act as a broker (suitability standard) when selling you insurance or an annuity. It is vital to ask if they will act as a fiduciary 100% of the time.
5. How can I verify my financial advisor’s background?
You should ask for their regulatory record. True fee-only fiduciaries are typically registered with the SEC and can be found on the Investment Adviser Public Disclosure (IAPD) website. If they are also on the FINRA website, they may be acting as a broker-dealer/hybrid advisor.
6. Is it okay to ask my advisor how much they are making from my account?
Absolutely. It is your money and your future. A true fiduciary will have no problem explaining their simple pricing model and disclosing every cent you are paying, both to them and to the investment companies they use.