Expertise Beyond the Numbers

Why Having A Fiduciary Financial Advisor Is More Important Than Ever

Making Headlines

The term fiduciary has hit the headlines on multiple occasions in recent months, since the Department of Labor’s fiduciary rule failed to make it out of court last December. DOL officials have since announced they’re coordinating a redevelopment of the rule with the SEC, so it’s fair to say the fiduciary talk will remain in the headlines. The regulation being discussed required all professionals offering advice on retirement accounts (including brokers who work for broker-dealers) to act as fiduciaries.

To understand why this debate is so significant, it’s important to know exactly what a fiduciary is. By definition, a fiduciary is an individual or sole organization who manages assets on behalf of another person (or entity) and is bound by a fiduciary duty, which is the ethical obligation to act solely in someone else’s best interests – removing any and all conflicts of interest.

Fiduciaries and fiduciary duty are nothing new for the financial and investment world, but the proposed DOL rule would expand the scope beyond registered investment advisers. This standard – concerning registered investment advisers – was made into law by the Investment Advisers Act of 1940. Regulated by the SEC or state securities regulators, the legislation stipulates that all registered investment advisers must act as a fiduciary. However, a broker (working for a broker-dealer), who is not a registered investment adviser, is not a fiduciary and therefore not currently held to the same standard of putting their clients’ interests above their own.

In terms of financial advisors, there are fiduciary advisors, who are registered investment advisers, and there are non-fiduciary advisors, which is where the DOL fiduciary rule alters the system. The DOL fiduciary rule – called the Employee Retirement Income Security Act – requires any and all financial advisors who provide retirement advice or work with retirement plans (401k, 403b, IRA) to act as fiduciaries under the fiduciary duty. The rule was intended to improve transparency around retirement planning, and would require financial advisors to disclose potential conflicts of interest and clearly disclose fees and commissions.

Fiduciary Duty vs. Suitability Rule

Registered investment advisors are bound by fiduciary duty in accordance with the SEC, but non-registered financial Advisors, including brokers, are only required to fulfill a suitability obligation. This standard, set and administered by FINRA (Financial Industry Regulatory Authority), requires these professionals to provide suitable recommendations to their clients. The suitability rule dictates that recommendations must at least consider a client’s finances, goals, and risk tolerance; but their recommendations may not necessarily be in the individual’s best interest, or could even benefit the broker more than the client.

Why It’s Important to Choose A Fiduciary

With the attention fiduciary duty is getting in the news, it’s increasingly important to consider a fiduciary advisor. The significance of a fiduciary is noticeable in the distinction between the suitability rule and fiduciary duty. Bound by fiduciary duty, clients can trust that the person managing their money must make decisions in their best interest. Fiduciaries are required to disclose any conflicts or potential conflicts of interest, and must always pursue the best prices and terms for their clients.

Just like a doctor or lawyer is legally required to perform their duty to the service of their patient or client, so too are registered investment advisers required to provide only the best for the individuals for whom they work. While the headlines may continue to feature news about fiduciary duty and the controversy in Washington may carry on for some time as the DOL works out their requirements, a fiduciary advisor will continue to be a safe choice for clients looking for transparency and honesty.

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