As defined by Investopedia, “a Fiduciary is a person or organization that acts on behalf of another, putting their clients’ interests ahead of their own”.
Investment Advisors work directly for their client and must act as a fiduciary and place their clients’ interests ahead of their own.
The traditional Stockbroker, on the other hand, work for their employers, the Broker-Dealer, and need to ensure the investments they are recommending and receiving commissions on are ‘suitable’ for their clients.
Many financial advisors will say they are a fiduciary and that their only compensation is from the fees they charge you for managing their assets, “AUM”, or the fees they charge you for creating your financial plan, yet there are many other ways for these advisors to still be compensated.
I would be leery to hire an advisor who claims they are a fiduciary yet still are compensated on products they are recommending to you. One great example are the advisors who are also licensed insurance producers. In the plan they charge you for creating, they will often recommend expensive Life, Long Term Care or even Annuity policies. These advisors are receiving handsome commission checks on inception of the policy as well as periodic ‘trailers’ for many years thereafter. This is also common for advisors recommending private placements, 1031 exchanges, as well as investments into opportunity zones. Advisors are not placing your interests ahead of their own when they are not transparent about making money on specific products they are recommending to you.
When meeting with your advisor ask them if they are truly fee-only, ask them what happens when they make these types of recommendations. Some affiliations vet these types of advisors, so be sure to look for the following associations: NAPFA, Fee-Only Advisors, XYPN which will only allow advisors to become members should they not receive these ‘hidden kick-backs’. Unfortunately, the CFP designation nor membership to FPA does not indicate a fee-only fiduciary yet.