Any discussion of fiduciary vs. non-fiduciary accounts hinges on the same element that separates fiduciary and non-fiduciary advisors. The key is whether the account, or the advice, is generated by one party entirely for the benefit of the principal. To put it in common terms, a fiduciary account is like a good, secure safe that a trusted guide found and set up for you to use, while a non-fiduciary account is a super-rewards credit card that starts at 0% but eventually sports a high interest rate. 

This article will provide more information about fiduciary accounts and look at the broader picture of how fiduciary advisors differ from non-fiduciary advisors.  

Fiduciary, non-fiduciary: What’s the difference?  

According to the FDIC, the Federal Deposit Insurance Corporation, individuals acting in a fiduciary capacity may open a deposit account for another person or persons – the principals. These fiduciaries could be acting in any one of several capacities, including as a: 

• Trustee 
• Nominee 
• Custodian 
• Guardian 
• Agent 

The FDIC also identifies several types of fiduciary accounts, including: 

• Accounts with a power of attorney 
• Decedent estate accounts 
• Real estate and other escrow accounts 
• Brokered deposits 
• UTMA accounts (Uniform Transfers to Minors Act) and UGMA accounts (Uniform Gifts to Minors Act) 

The FDIC insures fiduciary accounts as a part of any other accounts the principal has at a bank. If the fiduciary account plus other accounts add up to more than the FDIC insurance maximum of $250,000, that remaining amount would not be protected. 

Now, let’s look at non-fiduciary accounts. A bank customer could receive fiduciary trust and investment management services, and still have non-fiduciary accounts with the bank, including their credit card accounts and personal loan accounts.  

To understand the difference between fiduciary vs. non-fiduciary accounts, it helps to look at the duties and responsibilities of a fiduciary. 

Who is considered a fiduciary? 

A fiduciary accepts the legal and ethical responsibility of acting on behalf of and in the best interests of another party.  

This article will focus on the difference between fiduciary and non-fiduciary financial advisors, but other fiduciary relationships exist, including: 

• Trustee and beneficiary 
• Executor and legatee 
• Guardian and ward 
• Lawyer and client 
• Corporate board member and shareholders  
• Investment corporation and investors 
• Insurance agent and policyholder 

It’s clear in each case that the principal is in a vulnerable position and needs to be able to trust the fiduciary. Fiduciary duty is grounded in laws and regulations. The individuals acting in that capacity typically carry certifications that reflect special training and pledges of ethical behavior. Should they break the law or their vows, fiduciaries face legal and professional penalties.  

Fiduciary vs. non-fiduciary advisors: How to choose 

Is it accurate to say that a person seeking financial services and advice is in a vulnerable position? To some extent, it depends on the expertise of the client (the principal in this relationship) and the nature of the services and advice being sought. And those factors should be part of anyone’s choice between a fiduciary advisor and a non-fiduciary advisor.  

Here’s a look at some of the most important differences between the two.  

The standard they must meet 

Financial advisors come under many titles and provide a very wide array of services. The titles overlap and don’t always reveal much: financial advisor, investment advisor, wealth manager, financial planner, broker-dealer, financial coach, financial consultant.  

The difference in standards, however, is clear.  

A non-fiduciary advisor must meet the suitability standard when providing certain services. For example, broker-dealers, who buy and sell securities for clients and themselves, must act under the reasonable belief that a transaction and the frequency of transactions is suitable for a client. An advisor can benefit from commissions when he sells a client on something. A similar product with a lower commission could have worked just as well for the client but cost him less. However, the product with the higher commission was suitable for the client, so the advisor met the standard.  

A fiduciary must meet the standard of acting always in the best interest of the client. In the example we just gave, a fiduciary advisor would recommend the product that came with a lower commission because that is in the best interest of the client. The advisor makes less in commissions, but does not allow that to influence his recommendation.   

Another example of this standard can be seen when fiduciary investment advisors execute stock trades for clients. These investment advisors must use a “best execution” standard, which means executing trades using the lowest cost possible. 

How they are paid 

How do you know if you are dealing with a fiduciary advisor: because she works on a fee-only or fee-based structure. Fee-only means clients pay a flat rate or an hourly rate for services or pay a percentage of assets under management (AUM). When working for a percentage of AUM, advisors typically charge about 1%. For people with an AUM of many millions of dollars, the percentage is scaled back.  

Fee-based fiduciary advisors earn a combination of a fee and commissions. It’s important to ask if there are any instances in which they will act in a non-fiduciary capacity. A fiduciary advisor, for example, could recommend life insurance that is, indeed, in a client’s best interest and still receive a commission on the policy by arranging the sale.  

The fee-only fiduciary advisor earns no commissions or trading fees. They generally are seen as the most impartial type of advisor.  

Non-fiduciary advisors can be commission-based or fee-based. Commission-based advisors earn their pay when they sell a product or service to a client, such as insurance, stocks or a mutual fund. The payment does not come directly from the client. It comes from the provider of the product or services in such forms as upfront sales fees or percentages of the annuities or insurance policies sold. However, the fees and commissions reduce the return to the client. So, even if a commission-based advisor touts “free services,” they are not. 

Conflicts of interest 

Because they must always act in the best interests of their clients, fiduciaries must avoid any activity that presents a potential conflict of interest. Also, if any conflicts of interest become apparent after work has begun, the fiduciary must immediately notify the client.   

A non-fiduciary advisor does not face the same restrictions. That does not mean that they are looking to fleece their clients. However, they do have the option of benefiting themselves as they provide services.   

Relationship to client 

A fiduciary financial advisor is more likely to develop a long-term relationship with a client, rather than a transactional one. The added security that comes with fiduciary status appeals to clients who need long-term planning. Depending on a client’s stage of life, she might be looking for help with retirement plans, estate planning and investment strategy, or any one of those.   

In fact, individuals looking for a financial advisor should ask potential advisors about the style of communication they have with clients, including frequency of communication, availability and manner of communication. 

A non-fiduciary advisor can provide all those services as well – with the same amount of skill and integrity.    

Either way, it’s up to the client to be clear about what services he wants and to vet potential advisors to see which ones have the best combination of experience, certifications, fee structure and personality.  

Ideal type of client 

Individuals who know what they want and know something about how much it should cost to get it can be happy with a non-fiduciary advisor. That type of client does not need “hand-holding.” She wants a competent, ethical advisor who can carry out a transaction. If that advisor does a good job, maybe she’ll return for the next transaction.  

The “ideal client” for a fiduciary advisor has a more complicated financial life, is perhaps less knowledgeable about certain areas of finance and financial planning, and is thinking long-term. “Hand-holding” might be putting it too strongly, but this type of client wants someone who is diligently looking out for his best interests.  

Certifications 

Anyone can call himself a financial advisor. So, people who are in the market for one should look not for titles, but certifications. 

One of the key certifications is Certified Financial Planner (CFP). These licensed professionals are fiduciaries. Another gold standard for fiduciary guidance on investments is the Registered Investment Advisor, which signifies a fiduciary company registered with the Securities and Exchange Commission. A Registered Investment Advisor company employs one or more investment advisor representatives, or IARs. 

Chartered Financial Consultants (ChFCs) and Accredited Investment Fiduciaries (AIF) are fiduciaries. Also, the National Association of Certified Financial Fiduciaries administers CFF training and awards the certification to indicate that a professional is committed to the highest fiduciary standards. 

To vet a financial advisor, check out FINRA’s BrokerCheck. If a firm or an individual advisor doesn’t appear there, it indicates that he is not registered with the SEC or a state securities regulator. Also beware of people who are “dual registered” as brokers and advisors. That shows an inherent conflict of interest – someone who might advise you to buy what makes him a good commission. The SEC provides another useful site: SEC Action Lookup, which also allows people to check on the credentials and history of advisors and advisory firms.   

A matter of trust 

Signing up with a financial advisor amounts to a leap of faith. But always look before you leap. The wealth management company Cope Corrales provides a broad spectrum of fiduciary services. You can trust Cope Corrales to always act in your best interest.