What is a Fiduciary and Why Should I Care?


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If you’ve been reading the business pages recently, you may have heard the word “fiduciary” thrown around when it comes to the financial advice industry. The Department of Labor is proposing new rules for financial advisors that could have a dramatic effect on who can offer guidance on retirement plans and their duty to you. The proposed rules are being actively supported by President Obama, who has placed unprecedented focus on this issue.

The word fiduciary is defined as a person who holds a legal or ethical relationship of total trust with one or more parties, usually in financial matters.1 Under this standard, an advisor is required to meet a duty of loyalty and care, exercising prudence and diligence, with respect to the advice delivered to their clients.

It might sound like some obscure term used on in the back offices of the financial world. But the key point is whether the person offering you financial advice is required to act in your best interest, and avoid or disclose to you potential conflicts of interest.

As a client of an independent Registered Investment Advisor (RIA), and the Investment Advisor Representatives who work through the RIA, you are already protected by this standard. Now Congress would like all financial representatives, including those working for the large investment firms, to meet the same fiduciary standards. Currently, many of those advisors operate under a different, lesser standard of “suitability”.

A Change In The Law

Writing for Forbes, Maggie McGrath did a nice job of summarizing the issue as it was being debated by lawmakers last year:

“In April, the Department of Labor (which oversees retirement accounts) issued a fiduciary rule proposing that a ‘best interest standard’ be applied across a broader range of investing advice such that any advisor getting paid to provide personalized investment advice–on things like what assets to buy or whether or not to roll a 401(k) into an IRA–be considered a fiduciary and have to put their clients’ interests first.”2

Right now, brokers or registered representatives of firms who are not RIAs must only comply with a “suitability standard.” This means that their recommendations must be considered suitable to an investor’s needs, but can also be in their own and their firm’s best interest. A key distinction in terms of loyalty is also important, in that a broker’s duty is to the broker-dealer he or she works for, not necessarily the client served.

What’s the Difference for Investors

This spring the Department of Labor will finalize the new fiduciary rule. According to Reuters it’s expected to require banks, brokers, mutual fund companies, and insurance agents to keep fees low and protect customers from excessive risk when they are being advised.3

Investment Advisor Representatives in an RIA serve clients who value the benefits of transparency and accountability required under the fiduciary standard. Given the more stringent stipulations for investment fiduciaries, there is little question that the fiduciary standard better protects individual and institutional investors, than the suitability standard.4

As you would imagine, there is some pushback from the big suitability-based investment houses on Wall Street. But the idea that this protection could be extended to many more people who might not know the difference seems like it could be beneficial to the investor ultimately receiving advice or recommendations.


1. http://go.advisorlab.com/e/51582/default-aspx-selected-744/5xn8d3/275562960

2. http://go.advisorlab.com/e/51582/l-fiduciary-rule–737b2cff443e/5xn8d5/275562960

3. http://go.advisorlab.com/e/51582/iduciary-idUSKBN0UL1YO20160107/5xn8d9/275562960 

4. http://go.advisorlab.com/e/51582/bility-fiduciary-standards-asp/5xn8dc/275562960