“Fiduciary” is a funny word. You may have never heard of it until now, but you may actually have had a fiduciary in your life. More importantly, you may wish you had a fiduciary in your life.
Fiduciary is a term that applies to financial advisors. The definition states that a fiduciary always acts in the best interests of his or her clients — and ahead of their own interests.
If you are lucky, you had a fiduciary relationship with your parents; if they thought about you before they thought about themselves, they acted as a fiduciary.
When it comes to financial advisors, a fiduciary is someone who always considers the value of any investment or product purchase from the standpoint of the customer first, ahead of considering their own reward in the form of a commission or additional fees for service.
In fact, many true fiduciaries forgo commissions entirely in favor of accepting payment as an annual percentage of assets under management (AUM) or, the in the case of a financial planner, a set hourly fee.
It might seem common sense that at least retirement financial advisors should be fiduciaries, and the Department of Labor pushed just that outcome during the final weeks of the Obama administration.
The rule was rolled back at the last minute under the incoming Trump administration.
After a lengthy debate, as of June 30 a Best Interests regulation promulgated by the U.S. Securities and Exchange Commission (SEC) has been attached to most investment broker-dealers, creating a new standard of behavior among professionals who assist investors in making financial decisions, especially stock market investments.
Stockbrokers, of course, welcome the chance to continue to collect commissions while telling clients their interests are paramount. Critics of the new rule, called Reg BI, however argue that it falls well short of a true fiduciary requirement, substituting instead disclosure of potential conflicts in a form.
The right person
So how can you locate an actual fiduciary? If your financial advisor is a Certified Financial Planner (CFP), he or she must act as a fiduciary to retain their designation.
Most advisors trumpet their CFP status. It takes 18 to 24 months it takes to achieve it, after all. However, you can find out if your advisor is a CFP by accessing the online search tool at the CFP Board website.
But why should you care if your advisor is a fiduciary?
The fact is, any advisor who appears to consider his or her needs before the needs of the client is not likely to be very successful in their chosen field. But there are many stories told of consumers being misled by their financial professionals, and you do not want to be one of those unfortunate consumers.
Even if your advisor is acting as a fiduciary, he or she has to make money, and that means the advice offered has to be rewarded in the form of the fees you pay or the commissions he or she is paid by third parties, such as mutual fund providers, to recommend their products to you.
So, take two steps in your next conversation with your advisor, or in your initial conversation with a new or first advisor. Ask them if they are legally bound to act as a fiduciary, and ask them how they make their money.
The first question should prompt a simple “yes or no” response, and the second response should be easy to understand. If you don’t understand the response, ask for a better one.
There are, in fact, legal documents financial advisors must file with the SEC stating key factors about their firm and their practice, including statements regarding disciplinary history or conflicts of interest.
You can ask to see those documents. That is your right as the client.
The reason you want to know if your advisor is legally bound to act as a fiduciary is not to catch them failing to uphold that standard. The benefit is knowing that the decisions being made with your money must be first in your best interest, not the interest of the advisor.
Fiduciaries are not perfect nor is their advice infallible, but they are bound to avoid even the appearance of conflict when giving you that advice in the first place.