What Are Fiduciary & Non-Fiduciary Accounts?

Fiduciary accounts are accounts in which an individual or an organization holds funds or assets on behalf of another party. 

The fiduciary account meaning is that the person or organization responsible for managing the account is legally obligated to act in the best interests of the account holder. This means they must exercise a high level of care, loyalty, and prudence in managing the account.

On the other hand, non-fiduciary accounts do not have this legal obligation. 

In a non-fiduciary account, the individual or organization holding the funds or assets does not have to comply with the same standards of care and loyalty that apply to fiduciary accounts.

In the financial industry, fiduciary accounts apply in trust, estate planning, and retirement plans. Non-fiduciary accounts are common in brokerage and investment services.

What Makes The Fiduciary & Non-Fiduciary Accounts Unique?

The level of legal obligation held by the account holder is what makes the fiduciary and non-fiduciary accounts unique.

Fiduciary accounts are unique because the person or entity managing the account must act in the account holder’s best interest. 

Non-fiduciary accounts, on the other hand, do not have this legal obligation, which means that the account holder may not receive the same level of care and protection. Fiduciary deposits, such as those held in trust accounts, are particularly unique because they are legally protected and separate from other bank assets, ensuring that they are used exclusively for the account holder’s benefit.

Let us start by understanding what types of accounts fall into these two categories.

What Types of Accounts Can Be Considered Fiduciary & Non-Fiduciary?

Fiduciary vs non-fiduciary accounts refer to the legal obligation of the account holder to act in the best interest of their clients. Here are some common types of accounts that can be considered fiduciary and non-fiduciary.

Fiduciary Accounts:

1. Trust Accounts- A trust account is a fiduciary account where an individual or entity manages assets on behalf of another party. These accounts are commonly used in estate planning to protect and manage assets for beneficiaries.
2. Retirement Accounts- Retirement accounts, such as individual retirement accounts (IRAs) and 401(k)s, are also considered fiduciary accounts. Financial advisors who manage these accounts are legally required to act in the best interest of their clients.
3. Investment Accounts- Investment accounts managed by a financial advisor held to a fiduciary standard can also be considered fiduciary accounts. These accounts run on a fee-only basis.

Non-Fiduciary Accounts:

1. Brokerage Accounts- Brokerage accounts are non-fiduciary accounts where financial advisors are not required to act in the best interest of their clients. These advisors have a less stringent suitability standard, which means they are only required to recommend suitable investments for their client’s financial situation.
2. Non-Fiduciary Financial Advisor Accounts- Some financial advisors operate as non-fiduciaries. These advisors are not legally required to act in their client’s best interest; payment is through commissions on investment products.
3. Checking and Savings Accounts- Checking and savings accounts are non-fiduciary accounts. Banks that hold these accounts are not obligated to act in the best interest of their clients. However, they offer FDIC insurance on fiduciary deposits, which protects account holders in the event of bank failure.

Next, let us discuss the differences between fiduciary & non-fiduciary accounts in detail.