Fiduciary Duty vs. Best Interest: What the Legal Standards Mean for You
The Fundamental Choice: Fiduciary Advisor or Broker?
| Standard / Law | Entity Type | Role / Professional | Compensation Model |
|---|---|---|---|
| Best Interest / 1934 Act | Broker-Dealer or Insurance Company (variable products) | Financial Professional | Commission |
| Fiduciary / 1940 Act | Investment Advisor | Financial Advisor / Financial Planner / Investment Adviser Representative | Fee-Based or Fee-Only |
The Rules Have Changed: Fiduciary Duty vs Best Interest Standard
After the introduction of a new rule from the Securities and Exchange Commission (SEC), with a new interpretation from the Department of Labor (DOL) of an old law, the Employee Retirement Income Security Act (ERISA), the duties that financial advisors, financial professionals, ERISA fiduciaries, and financial planners owe to their clients have converged.
However, a key difference still exists in whom they serve: a Fiduciary serves only you, whereas a Broker can serve both their firm’s interests and yours.
A broker-dealer (B/D) is a firm that buys and sells securities and operates as both a broker and a dealer, depending on the transaction. Fidelity, Charles Schwab, and Vanguard are among the largest B/Ds. Many regional and independent B/Ds also exist, such as LPL Financial, Ameriprise, Cambridge Investment Research (my broker-dealer), and Raymond James.
Their advisors are called registered representatives or financial professionals, who are usually paid a commission for selling financial products. They are not fiduciaries, but they are required to recommend a suitable product to their clients. Best Interest replaced suitability as the required standard in 2020.
Investment advisers differ from broker-dealers. With a fiduciary duty to their clients, investment advisers operate under the 1940 Act and follow a distinct business model. They typically receive fees rather than commissions.
Three federal acts regulate financial advisors: the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the 1974 retirement protection law, ERISA. The 1934 Act regulates broker-dealers, the 1940 Act regulates investment advisers, and ERISA governs retirement plans. (State laws also regulate them, and most insurance products are regulated at the state level.)
Today's Rulebook: SEC Regulation Best Interest and Fiduciary Duties Explained
The Department of Labor (DOL), which oversees retirement plans, has spent more than 15 years trying to extend fiduciary duties to rollover advice. Its most recent attempt, the 2024 Retirement Security Rule, never took effect. Courts in Texas vacated it, and in March 2026 the DOL formally removed it and reinstated the 1975 five-part test for defining a fiduciary. The DOL also withdrew its 2020 interpretation that treated one-time rollover advice as fiduciary advice.
Under the five-part test, advice must be given on a regular basis, among other conditions, before someone becomes an ERISA fiduciary. As a result, a one-time recommendation to roll over your 401(k) or 403(b) is generally not fiduciary advice under DOL rules.
That leaves the SEC’s Regulation Best Interest for brokers and the fiduciary duty of the 40 Act for investment advisers. Best Interest aligns closely with the fiduciary responsibilities in the 40 Act, but a broker can still serve the firm’s interests alongside yours. When you’re deciding on a rollover, it matters whom you’re working with.
Fee-Only, Fee-Based, Financial Planner: What These Titles Really Mean
Around the time advisors were switching to fee-based, the financial industry began embracing personal computers. As a result, some firms started charging clients fees to develop a comprehensive financial plan. First, the client filled out a lengthy questionnaire. Second, the financial planner inputted the data into a software program and then printed the client’s financial plan, usually presented in a fancy binder.
Most plans presumably ended up in the filing cabinets of clients, recalling President Eisenhower’s line about plans: ‘I have always found that plans are useless, but planning is indispensable.’
There is no ‘financial planner’ in the regulations. Instead, there are investment advisor representatives and registered representatives. ‘Financial planner’ is more of an industry term for someone who looks at your entire financial picture. Some financial planners are fiduciaries, and others are not. Some charge a fee, some are compensated through a commission, and some receive both.
A private organization offers a designation: Certified Financial Planner. Since 2019, all holders of that designation are required by the organization to be fiduciaries. But the 40 Act determines if someone is acting as a fiduciary, so the organization’s requirement is its own definition of fiduciary, not a legal one.
There is also an organization called the National Association of Personal Financial Advisors (NAPFA), a directory where you can find a fee-only advisor in your area. NAPFA-Registered Financial Advisors pay $695 in annual dues, plus a one-time, non-refundable $150 processing fee.
The Dodd-Frank law emerged from the 2008 financial crisis. Its main objective was to shore up the banking system. Dodd-Frank also tasked the SEC with studying whether the rules regulating financial advisors needed to change. The goal was to ensure the public was benefiting from having two silos of commissions and fees and whether it behooved brokers to become more like investment advisors (fiduciaries).
After extensive discussions, the SEC established a new rule called Regulation Best Interest. This rule requires brokers to act in your “best interest,” but it does not mandate that they become fiduciaries. Instead, brokers can continue to serve as agents of their firms, which often restricts their recommendations to a limited selection of proprietary products.
Remember, financial advisors are either registered representatives affiliated with B/Ds or investment advisor representatives working for investment advisors. I am dual-registered—that is, I am a registered representative of a B/D and an investment advisor representative of an investment advisor.
How Compensation Models Have Evolved
Having been a financial advisor and financial planner for over thirty years, I have witnessed many financial advisors’ changing compensation structures. For example, when I started, most personal financial advisors were paid commissions from selling a financial product or investment.
About midway through my career, the compensation in the marketplace began changing. More and more advisors began moving to a fee-based or fee-only financial planning compensation arrangement. So, instead of charging commissions from the sale of an investment, the financial advisor usually charges an ongoing fee, a percentage of the client’s investment for financial planning services.
The hope is that by disconnecting the compensation from the product, the client would receive better advice. However, another concern was that the planners were less inclined to provide ongoing advice when compensated from an initial product sale.
Why I Am (and Choose to Remain) Dual-Registered
I remain registered as an investment adviser representative and as a registered representative. Most of my business is as a fee-only investment adviser representative, where I charge clients a fee or an hourly rate for my advice. I like this arrangement because it is not product-based, and I can get paid to provide ongoing advice to my clients.
However, I keep my registered representative license because, when I compare a commission product, it makes more sense for the client. For example, a new client who is 25 years old wants to contribute $7,500 to a Roth IRA—I cannot imagine charging them a fee for the next 40 years.
Also, I like to use American Funds for some clients with big 401k or 403b accounts, if I recommend that they roll over their money. If their 403b or 401k account balance is over a million, they pay no sales charge. And American Funds has some of the lowest management fees for actively managed funds. They also offer excellent funds for customers interested in generating retirement income. But I need to have a registered representative license to provide this option.
What the Fiduciary Standard Means for Your 403b, IRA, or Rollover Decision
If you have an IRA and work with a financial advisor, now is an excellent time to review the arrangement: fee or commission, best interest or fiduciary. If you are thinking of rolling over a 401(k) or 403(b), ask your advisor directly whether they are acting as a fiduciary when they make that recommendation.
Suppose you happen to administer a retirement plan for an employer: review how any advisor is compensated and in what capacity they serve the plan.
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Your Independent, Dual-Registered Fiduciary Advisory
I’m an Investment Adviser Representative with Cambridge Investment Research Advisors, Inc. (RIA) and a Registered Representative with Cambridge Investment Research, Inc. (broker-dealer). My practice is independent and locally operated—so you work directly with me—while I’m supported by a national compliance, technology, and service platform.
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Wherever you are in Massachusetts, I provide ongoing support—not just a one-time meeting.
These are the opinions of Financial Advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice. Content provided via links to third-party sites should not be considered an endorsement of content that we cannot verify completeness or accuracy of.