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Broker, advisor, or fiduciary: What's the difference?

There are a wide array of titles for those who work in the financial industry. Some put their client first, while others owe their loyalty to their employer or to other companies whose products they are pushing. Knowing the difference can be key to successful money management. 

Why does it seem that everyone in the finance world is suddenly talking about the word 鈥渇iduciary鈥�? The White House, the Labor Department, the Securities and Exchange Commission and the Financial Industry Regulatory Authority are all discussing it, as are financial services firms, and it has quickly become a water cooler topic.

So, what is a fiduciary, and how is the title different from broker, agent or advisor?

To many people it may seem that this once-unfamiliar word has materialized out of nowhere, but it鈥檚 been around for a long time, mainly used by legal and financial professionals. A fiduciary is a financial professional who always puts clients鈥� needs ahead of his or her own and avoids or discloses conflicts of interest. The 鈥渇iduciary standard鈥� describes the way financial professionals must treat their clients 鈥� it鈥檚 a standard of care that certain financial professionals must apply to every client and every business dealing.

Why titles are imporant

You may wonder why all this talk of roles and titles is necessary. Can鈥檛 we just assume that professionals who work in finance mean well and do the right thing for us.

Not always. Sometimes they owe their loyalty to their employer or to other companies whose products they are pushing. Figuring out where their loyalties lie can often be difficult.

This is where titles, credentials and a free background check come in. They鈥檙e designed to help you figure out whether the person you鈥檙e talking to is skilled, competent and aligned with your interests.

Here鈥檚 why titles are important: It鈥檚 entirely possible that a person you鈥檙e paying to give you financial advice is not a fiduciary, meaning that he has something other than your best interests at heart. He could instead be a broker, with sales quotas, products to sell and his own personal financial objectives at heart when he suggests certain investments. Brokers and others not required to adhere to the fiduciary standard are allowed to suggest investments that are merely 鈥渟uitable鈥� but do not necessarily put their clients鈥� best interests ahead of their own. This also applies to many insurance agents and financial advisors.

This can be a major problem for individual investors and certainly for things like 401(k) plans because it鈥檚 nearly impossible for laypeople to understand what type of financial advisor they鈥檙e talking to 鈥� a broker, an insurance agent or a fiduciary 鈥� and under what conditions. Yes, you read that last part correctly: There are some people who may be a fiduciary in some conversations and not in others.

But don鈥檛 worry, there are some ways to figure this out, and more help may be on the way.

Understanding the trust factor

The first thing to understand is that the term 鈥渂roker鈥� actually means something. People cannot work in finance and call themselves a broker unless they pass a test and stay registered with the appropriate authority. It then means that they are authorized to facilitate buying and selling listed securities (things such as stocks, bonds and mutual funds, for example).

鈥淔inancial advisor,鈥� on the other hand, doesn鈥檛 mean anything in particular. Nearly anyone can call herself a financial advisor.

So, why do so many people use the title financial advisor?

It comes down to the trust factor. People are already anxious about their money. Whether you鈥檙e wealthy or buried in debt, it can be difficult to entrust your innermost financial secrets to someone. If you get the feeling that the person across from you is looking at you as a sales prospect, you鈥檙e likely to clam up. If you鈥檙e in a financial discussion and that person introduces herself as a broker or an insurance agent, she know she鈥檚 likely to have to work that much harder to earn your trust. 鈥淔inancial advisor鈥� feels warmer.

But now we鈥檝e had many bank representatives, insurance agents, brokers, financial planners and maybe even credit card and credit counseling people using the title financial advisor. This has clouded the conversation. It鈥檚 no wonder financial advisors, by profession, are not entirely well regarded, even though the title sounds more trustworthy than others.

Clients eventually figure out if they鈥檝e been sold something that鈥檚 not entirely in their best interests, by someone who is ultimately not liable because he is not subject to the fiduciary standard.

Because so many different types of people might be called financial advisor, it makes it nearly impossible for people to figure out who is helping them and who is selling them.

As far as retirement accounts and 401(k) plans, the person consulting is seldom a fiduciary. These potentially powerful savings vehicles have been taken advantage of for decades by various types of 鈥渇inancial advisors鈥� who provide little tangible value to the plan. They are often there simply to sell products, at fees that are not justified.

Defining a fiduciary

So what聽exactly聽is a fiduciary?

Depending on which regulatory agency you ask, you may get a different answer, which means that even some financial professionals wrestle with whether they are a fiduciary, and under what circumstances.

A new proposal winding its way through the regulatory process in Washington includes a part not only defining who is a fiduciary but also creating a universal definition of the term. These proposals are getting opposition from certain circles. Some people who work in finance argue that moving every retirement account 鈥� or at least just those held by people who choose to work with an advisor 鈥� into a fiduciary relationship will harm the small investor.

That is a thinly veiled way of saying that the only thing motivating brokers to work with small investors is the lower grade of service they can offer, and the higher fees they can charge. If fees were reduced and services and liability increased, many brokers say they鈥檇 have to stop supporting small accounts.

This may not be a bad thing for smaller investors. Individual small accounts (depending on the firm, this is often described as anything less than $100,000, $250,000 or $1 million) might find better services at a lower cost by using a small financial services firm that adheres to the fiduciary standard.

To find out more about potential financial representatives, their credentials and what role they鈥檙e likely to fill, visit聽聽and click on the free 鈥淏roker Check鈥� link. This site also links to the聽. Between these two sites, you can learn a great deal about the skills, credentials and particular focus of any licensed professional.

A key question to ask people with whom you are considering working (especially where retirement plans are concerned) is whether they are a fiduciary. If they tell you yes, get it in writing.

For a free copy of the e-book 鈥淔inancial Industry Designations Explained,鈥� visit聽.

Learn more about Jonathan on聽.