By Nina Gass
You may have heard the phrase “fiduciary responsibility” in reference to finance and investment professionals. However, while the phrase is familiar, you may not entirely understand fiduciary meaning in terms of how it impacts you as a client.
What you do know is that situations like the Madoff Ponzi scheme illustrates a complete lack of ethics. But, it is also a significant example of a breach of fiduciary responsibility.
This article looks at what fiduciary means in relation to legal obligations and lists those types of advisors that must adhere to this principle.
The Oxford Dictionary says the fiduciary meaning is something “involving trust, especially with regard to the relationship between a trustee and a beneficiary.”
The dictionary used the example of how a company has this responsibility to its shareholders. The company must deliver a strategy that drives revenue and profitability. This action can raise the value of the shares in the company for the benefit of shareholders who invested their money. They want to benefit by receiving a greater return.
The fiduciary standard was established as part of the Investment Advisers Act of 1940 to ensure this legal obligation to clients.
However, not all financial professionals are bound by this fiduciary standard. Some like broker-dealers, advisors, and insurance agents only operate under the suitability standard. The suitability standard only requires that a financial professional recommend “suitable” investments for clients, putting them under no legal obligation to put their clients’ interests ahead of their own.
Advisors who aren’t held to a fiduciary rule may suggest “suitable” retirement products, specific funds, or insurance policies that will provide them with a commission or bonus, even if there’s another product that would be better for the client.
You might think that having certain certifications may indicate that a financial advisor has fiduciary responsibility. This is the case with some, but on all, certifications. Some financial organizations like NAPFA and the XY Planning Network make it a requirement of membership to take a fiduciary pledge, and/or agree to declare to the SEC that they will not receive any product commission.
The Institute For the Fiduciary Standard has introduced the Real Fiduciary™ Practices Affirmation Program. This program shares information on participating advisors that have committed to its professional conduct standards.
The Department of Labor is considering rule changes that could change the scope of who is considered a fiduciary or what’s required to meet the standards. The details of the rule change–and whether it will pass at all–remain uncertain.
Although there is not a standard set of criteria that identifies how this fiduciary responsibility should be met, there are guidelines to help a financial advisor and their clients ensure this responsibility is met.
To put the benefits of clients first, a financial advisor should take a comprehensive approach to considering all available and relevant data about the client. Make sure your financial advisor is considering factors like your age, income, tax situation, and unique financial goals along with all publicly traded information about the potential investments they recommend. Every suggested investment should show a direct connection to you as well as illustrate why it would benefit someone with your specific criteria.
Showing fiduciary responsibility means that your financial advisor is unbiased in their approach to research and investment recommendations. They must put your interests first rather than their own, which is why we recommend seeking a fee-only financial advisor versus a commission-based financial advisor. Another sign of fiduciary responsibility is transparency: Look for an advisor who is willing to show you what analysis was performed and the data to back up their financial advice.
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