"Financial advisor" is not a legal title. Anyone can use it. The rules that protect you depend on how the person is registered, and there are two main kinds.
Investment adviser
Paid by you to give advice
- Registered with the SEC or a state.
- Fiduciary: must put your interests first, for the whole relationship, not only when selling you something.
- Usually paid by you directly: a percent of the money they manage, a flat fee, or an hourly rate.
- Must tell you about conflicts of interest, and files a public form (Form ADV) that says how they are paid.
Broker
Paid to sell and trade investments
- Registered with FINRA through a brokerage firm.
- Must act in your "best interest" when they recommend something (Regulation Best Interest, since 2020).
- Usually paid commissions and other payments tied to the products they sell.
- No duty to keep watching your account afterward unless they agree to.
What "fiduciary" means
An investment adviser owes you a fiduciary duty under the Investment Advisers Act of 1940. The SEC describes it as two duties that cover the entire relationship:
- Duty of care: give advice that fits your goals and situation, look for the best way to carry out trades, and keep an eye on things as often as the relationship calls for.
- Duty of loyalty: never put their own interests ahead of yours, and tell you plainly about any conflict so you can decide whether to accept it.
Read the SEC's own explanation: Commission Interpretation Regarding Standard of Conduct for Investment Advisers↗.
What brokers have to do
Since June 30, 2020, brokers have followed Regulation Best Interest↗. It was a real improvement over the old "suitable" rule: a broker's recommendation must be in your best interest when it is made, and they must disclose conflicts.
But it is narrower than a fiduciary duty:
- It applies at the moment of a recommendation. A broker generally has no ongoing duty to watch your account.
- Commissions and other product-based pay are allowed. A broker can earn more for selling one product than another, as long as the conflict is disclosed and managed.
- A broker can limit you to the products their firm offers.
Why the way someone is paid matters
People respond to how they are paid. That is not an insult; it is how everyone works.
- Commission pay rewards transactions. The seller earns money when you buy, sell, or switch products. Some mutual fund share classes and many annuities pay the seller several percent of what you put in.
- A fee paid by you rewards keeping you happy as a client. The adviser earns the same whichever fund they pick, so there is less reason to steer you toward the one that pays them best.
Costs of any kind add up. $100,000 growing for 30 years at 6% a year becomes about $574,000. At 5% a year, because one more percent goes to costs, it becomes about $432,000. That single percent costs about $142,000. Ask every professional what you will pay each year, in dollars.
The catch: many people are both
A lot of financial professionals are registered as both an investment adviser and a broker. In the SEC's current list of individual advisers, 77% (338,012 of 440,103 people) also hold an active broker registration. They can act as a fiduciary for one account and as a salesperson for another, sometimes for the same client. People call this "switching hats."
Since 2020, a broker who is not also registered as an investment adviser generally cannot call themselves an "adviser" or "advisor." But because so many people are both, the title still does not tell you which rules apply to a given recommendation.
Words to watch:
- Fee-only: paid only by you. No commissions from anyone. This is the cleanest arrangement.
- Fee-based: sounds the same but usually means fees and commissions.
How to check someone
- Search for the person or their firm here. Look for Adviser only (the person is not also a broker) and No sales ties (the firm reports no broker or insurance business and no commissions).
- Look for disclosures: customer complaints, regulatory actions, firings, and similar events.
- Ask for the firm's Form CRS, a short relationship summary every adviser and broker must give you. Investor.gov explains it↗.
- Ask the questions in our checklist, and ask for the answers in writing.