What Is a Fiduciary? Understanding This Important Financial Advisor Distinction
By Ashley Brooks on 09/06/2018
You do your best to keep up with important information about your money. Your friends are constantly asking your advice about bank accounts, interest rates and retirement funds because they know you put plenty of time into understanding the finer points of the financial world.
Now there’s a new financial question on your radar, and you’re searching for answers: What is a fiduciary? This isn’t the first time you’ve run into a complicated financial term. “Fiduciary” is just the latest piece of jargon you’ve heard circulating through the news cycle. You’re determined to get to the bottom of what it means and how it could affect you and your investments.
We’ve done some digging to help you crack the code, so you can officially cross “fiduciary” off your list of vocab words to learn. Read on to discover what it means, why it’s in the news and what you need to know about it.
What does it mean to be a fiduciary?
The financial world may be in upheaval over potential rules regarding fiduciaries, but the word itself is fairly simple. A fiduciary is a person or corporate entity that has the power to act on someone else’s behalf in situations that require openness, trust and good faith.
Being a fiduciary is a big obligation. Not only are fiduciaries required to act in someone else’s best interests, but they also have to maintain “duty of care.” That means the fiduciary role isn’t a one-time-only job. These professionals are required to stay current with the assets and other life changes of their beneficiaries, so they can continuously adjust their advice and provide a high level of ongoing care.
With much power comes much responsibility, which is why being a fiduciary is considered “the highest legal duty of one party to another.” Fiduciaries are beholden to the beneficiaries they serve. It’s their duty to act in the best interest of the party they represent, even if that means setting aside their own self-interests.
Which professionals are fiduciaries?
Fiduciaries don’t just appear in the world of financial advisors. A fiduciary could be the legal guardian of a minor, the executor of an estate or the board member of a corporation. In each of these circumstances, a fiduciary typically holds some control over another person’s assets.
Certain people are automatically fiduciaries. Doctors must give advice and take actions that are best for their patients; real-estate brokers are duty-bound to tell their clients if the house they want to buy is overpriced. But does the definition of fiduciary extend to financial advisors? That’s where things get tricky.
A Personal Capital report found that nearly half of all Americans believe that all financial advisors are required by law to act in their clients’ best interests.* Unfortunately, that belief is a misconception.
While some investment advisors are held to fiduciary standards, stockbrokers and broker-dealers are not. Instead, brokers are held to a “suitability” standard, which does not require avoiding conflicts of interest or maintaining duty of care like a fiduciary must. A broker must simply recommend investments that align with a client’s needs at the time of their meeting, but they don’t have to present the best or least-expensive option.
What is the “fiduciary rule”?
Most people want to know if the person in charge of their investments is required to act in their best interests, but it’s a difficult distinction to make. That’s where the fiduciary rule comes in. This rule, created under the Obama administration, would have required all financial advisors who offer retirement planning to act as fiduciaries.
The fiduciary rule was initially supposed to take effect in April 2017, but the Trump administration delayed its implementation and called for the Department of Labor to make an “economic and legal analysis” of the rule’s impact on the financial industry. This kicked off a long series of delays, extensions and court cases surrounding the fiduciary rule.
On June 21, 2018, the U.S. 5th Circuit Court of Appeals ruled that the Department of Labor had “overreached” with the fiduciary rule, as reported in the Wall Street Journal. The rule was found to be “unreasonable” and is no longer on the horizon for the financial industry.
How does this impact financial advisors?
The fiduciary rule made waves even though it never went into effect. Many broker-dealers were already putting additional documentation into place to prepare to show compliance with the rule. Some of them may choose to maintain this new system as a way to prove their suitable recommendations for clients. Firms have also already removed products that didn’t meet fiduciary standards, such as those with high fees.
Though the fiduciary rule was struck down, additional regulation seems to be the trend when it comes to financial advising. The Securities and Exchange Commission (SEC) has proposed its own version of the fiduciary rule that would require broker-dealers to disclose conflicts of interest and act in a client’s best interests.
The fiduciary rule has brought the public’s attention to an important detail that went unnoticed for decades. Now, financial advisors across the industry are preparing to meet the growing need for transparency and trust.
The financial world is calling
Not everyone is cut out to work in the world of finance. Now that you’ve got answers to the question, “What is a fiduciary?”, you’re already ahead of the crowd.
*2017 Personal Capital Financial Trust Report: How Americans Feel About Trusting Financial Advisors, Fees and the Future
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