What the heck does fiduciary mean, who is a fiduciary, and why should you consider it to be such a big deal?

Some background History on the Fiduciary Rule

Back in 2015, then president Barack Obama in an address at AARP stated, “I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.  It’s a very simple principle:  You want to give financial advice, you’ve got to put your client’s interests first.  You can’t have a conflict of interest” (Remarks by the President at the AARP).  The Fiduciary Rule was met with a lot of backlash by broker dealers, registered investment advisors, and insurance companies and was eventually, “struck down by a federal appeals court in 2018” (DOL proposes new standard to replace vacated fiduciary rule 2020).  Currently, Regulation BI (Best Interest) helps to meet the DOL’s compliance objectives (DOL proposes new standard to replace vacated fiduciary rule 2020). 

What does fiduciary mean?

A fiduciary is, “legally sworn and obligated to always place the interest of the client ahead of their own” (Raising the Visibility of Fee-Only Advisors, Individually and Collectively 2020).  The purpose of the original Fiduciary Rule was to protect the interests of the investing population and restrict the ability of advisors to give inappropriate advice which would produce a financial gain for the advisor.  Financial advisors are certainly allowed to be paid for their advice services, but they must provide advice with total respect for the best interest of their client and without opportunistic intent.   

The reason it is important to choose a fiduciary advisor

Ethically derived advice, transparency of fees, and avoidance of conflicts of interest are key reasons to work only with fiduciary advisors.  This sounds simple, but when money is involved a prudent investor will want to be sure they are working with an advisor who is committed to a fiduciary duty as they offer advice.  If an advisor is motivated to sell products on a commissioned basis, this may be a sign the advisor could be swayed by compensation instead of acting in the clients best interest.  So how can this be avoided?  Find an advisor who works for a fee-only.    

Are there questions you should ask as you interview an advisor  or planner?

It is important to know what questions to ask of an advisor while you interview them to see if they are a good fit.  Consider the following:

  1. How are you compensated for your services?  Fee-only advisors are paid only by the clients they serve.  They are not provided compensation incentives by investment or insurance companies like those who operate a fee-based business.  
  2. What is your professional training and do you maintain a designation which holds you to a fiduciary standard like a Certified Financial Planner ™ (CFP®) practitioner? 
  3. Do we have any conflicts of interest I should be aware of?  This again is an opportunity to better understand their fees or if they will receive any compensation from third parties for referrals.  It is completely acceptable when a fiduciary advisor recommends another professional, but it is not acceptable if they receive a kick back for the referral. 

You won’t want to stop with only these three questions.  Some other questions you may want to ask are, how often will you and your advisor meet, what is their investment philosophy, and do they have account minimums you must meet?  Once your questions have been thoroughly answered, you will want to ask yourself, do I trust this person, will I enjoy working with this person, do they listen to my concerns?    

Conclusion

The fiduciary standard and practice of a financial planner should not be underestimated. The Fiduciary Rule and Reg BI are helping to change the requirements of financial advice provided.  Investors should ask plenty of questions to ensure they are working with a qualified fiduciary who will work with their clients best interests as a priority.    

About the Author

Author, Marianne Martini Nolte, Certified Financial Planner ™ practitioner, provides fee-only, fiduciary, independent financial services.  Her firm, IMAGINE FINANCIAL SERVICES (IFS) is a registered investment advisor offering advisory services in the State of California and in other jurisdictions where exempted.  Marianne’s focus is serving women and generations X, Y, and Z.  This article is intended as a high level view.  

All written content is for information purposes only. Opinions expressed herein are solely those of IFS, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. 

For more in depth information, please reach out:

Marianne Martini Nolte, CFP®

Imagine Financial Services 

Website, www.imaginefinancialservices.com  

Email, mnolte@imaginefinancialservices.com

Phone, (760) 472-5155

Reference

DOL proposes new standard to replace vacated fiduciary rule. (2020, July 09). Retrieved December 05, 2020, from https://www.investmentnews.com/labor-department-standard-replace-fiduciary-rule-194596

Raising the Visibility of Fee-Only Advisors, Individually and Collectively. (n.d.). Retrieved December 05, 2020, from https://www.feeonlynetwork.com/

Remarks by the President at the AARP. (n.d.). Retrieved December 05, 2020, from https://obamawhitehouse.archives.gov/the-press-office/2015/02/23/remarks-president-aarp