In today's financial services industry, the terminology is becoming ever more confusing: advisor, broker, chartered financial analyst, certified financial planner, certified investment management analyst and, more recently, fiduciary. Understanding this last term can make a huge difference in how you choose what kind of advisor you have and how they manage your money.

A fiduciary is a person given the power to act on behalf of another and put their interests first. The Investment Advisors Act of 1940 is a law that was enacted in order to regulate advisors who, for compensation, give advice to others as to the value of securities or as to the advisability of investing in, purchasing or selling securities. The law establishes principles for how advisors should treat their clients, which courts have interpreted to be fiduciary obligations.

The advisor, as a fiduciary, owes the client a duty of loyalty, which means they must act in the best interest of the client. If a conflict of interest exists, the advisor must make full and fair disclosure of all material facts so the client can make an informed decision whether to proceed with a transaction.

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Additionally, the advisor owes the client a duty of care, which means the advisor's advice, based on a reasonable inquiry of the client's financial situation, investment experience and investment objectives, is in the client's best interest.

In other words, according to the Securities and Exchange Commission rules and the Investment Advisors Act of 1940, the five responsibilities of a fiduciary are:

Put client's interests first. Act with the utmost good faith. Provide full and fair disclosure of all material facts. Do not mislead clients. Expose all conflicts of interest.

The Department of Labor, not the SEC or Financial Industry Regulatory Authority, has broadly redefined financial advice to include investments and insurance recommendations, for compensation, to plans, participants and IRA owners.

Currently, only independent registered investment advisors are required to act in a fiduciary capacity. Brokers or financial advisors working for a broker-dealer firm or an insurance company are held only to a suitability standard (not a fiduciary standard).