I mean fiduciary. Why, what were you thinking?
Fiduciary, pronounced fi-DOO-she-air-ee. In the financial services industry, this is a very important word. It describes a kind of relationship. The kind of relationship you want to have with someone giving you financial advice.
Fiduciary And Suitability Standards
Financial advisors fall into two categories based on their legal relationship to their clients. Some advisors are fiduciaries and others are only held to the suitability standard.
A fiduciary advisor is legally obligated to act in the best interest of the client. They have to set aside their own interests and always put their client first.
An advisor under the suitability standard only has to provide the client with a product or advice that is suitable, even if it’s not the very best. They have a lot more flexibility in what they can recommend to clients.
Difference Between Fiduciary And Suitability Standards
What’s the difference? Let’s look at an example that we’ll all understand; car shopping. If I needed a new car, I would go to a car dealership and tell them that I need something to get me around town with my two kids.
A fiduciary salesman would ask me some more questions to get a better idea of what I need. Car or SUV? What’s more important, gas mileage or luxury features? Based on my answers, he would recommend the vehicle that he thought would be the absolute best to meet my needs, like a mid-size sedan or small SUV. He wouldn’t be allowed to take into consideration the commission he stood to earn when making his recommendation.
What would it look like under the suitability standard? I could be recommended a Hummer or a two-door Mustang. Either of those vehicles would be considered suitable because they could get me and my two kids around town. They would get the job done. But are they really good options? Not by a long shot. Ask anyone that’s ever tried to put a car seat in the back of a Mustang.
Which Advisor Is Better?
The difference between the two is that a fiduciary has to recommend the very best option and other advisors can get away with anything that can get the job done.
Does that mean all advisors who aren’t fiduciaries are giving substandard advice in order to maximize commissions? No, there are plenty of men and women of integrity who are not legally held to the fiduciary standard but still put their clients first. It’s just harder to tell who they are when they aren’t required to act as fiduciaries.
When working with a financial advisor, make sure to ask if they act as a fiduciary. If they do, it should be in writing. If they are not a fiduciary, be careful. Make sure you have full confidence in their integrity and their recommendations before working with them.
What Is The DOL Fiduciary Rule?
This F word, fiduciary, has been in the news a lot over the past year because of a controversial Department of Labor rule. Often called the Fiduciary Rule, it would elevate anyone giving retirement plan advice to a fiduciary standard. They would have to be open about any potential conflicts of interest and disclose all commissions and fees in dollar form.
The rule was originally slated for implementation this year. However, it was delayed this spring so that the DOL could assess its economic and legal impact, and then delayed several more times. As things stand right now, it should be fully functional July 1, 2019.
Even after the rule is fully implemented, you need to be on guard. The rule only applies to retirement advice. It doesn’t cover other kinds of accounts or insurance.
So, next time you’re shopping for a financial product or advice, don’t be afraid to use the F word. Ask: Are you a fiduciary?