What Is A Fiduciary And How Can One Ensure You Have The Best Possible Retirement Outcomes

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If you have been looking for a financial advisor or retirement and income specialist recently, you may have run across the term “fiduciary.”

Fiduciary rules have been in the news lately due to some new Department of Labor (DOL)  rules which clarify which financial professionals are considered fiduciaries and which are not.  In June of 2020, the DOL announced newly proposed exemptions to prohibited transaction restrictions in an amendment entitled “Improving Investment Advice for Workers and Retirees.”   Many investment advisors acting in a fiduciary capacity approve of these exemptions, which are broader and more flexible.  If you are interested in the particulars of these new rules, an internet search will provide more in-depth information.

What is a fiduciary anyway? Simply put, a fiduciary is an organization or individual that acts on behalf of another person or group of people. A fiduciary is always expected to preserve good faith, putting their clients’ interests before their own, and maintaining trust. A fiduciary is bound both ethically and legally to act in another’s best interests.

Fiduciary relationships exist in many places but tend to show up most in the financial area. Examples of fiduciaries you encounter regularly are financial advisors, bankers, estate executors, and corporate officers. A fiduciary relationship involves two parties: the fiduciary and the client or group.

The fiduciary rule in financial services.

Section 3 (21) of the US Employee Retirement Income Security Act of 1974 (ERISA) and Section 4975 (e) (3) of the US Internal Revenue Code of 1986 provided what is known as the “Five-Part Test” to decide who is a fiduciary in financial services. There have been ongoing revisions to this legislation, and a great deal of controversy as well.

Under the Department’s five-part test, for advice to constitute “investment advice,” a financial institution or investment professional who is not a fiduciary under another provision of the statute must—

  1. Render advice to the plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property,
  2. On a regular basis,
  3. Pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that
  4. The advice will serve as a primary basis for investment decisions with respect to plan or IRA assets, and that
  5. The advice will be individualized based on the particular needs of the plan or IRA.

I don’t want your eyes to glaze over going over all the rules, exceptions, and opinions here. And, you don’t need to perform the “Five-Part Test” to see if your financial professional is a fiduciary or not. Just ask.

If your advisor tells you they are NOT a fiduciary, you should ask why. He or she should explain in clear, precise language why they have chosen not to become a fiduciary.

Do you need a fiduciary advisor? Fiduciaries in financial services must exercise greater care with their clients than their non-fiduciary counterparts. Non-fiduciaries legally only have to operate according to “suitability.” The suitability standard means that the agent indicates that advisors only need to match their clients with advice, strategies, and products appropriate for their particular circumstances, goals, and personalities.

Suppose you are a hands-on rather than a passive investor, and you only need someone to follow your orders and handle the necessary administration of your accounts. In that case, you probably only need a non-fiduciary salesperson or broker. If, on the other hand, you need real investment advice and guidance, you need a fiduciary. To be sure, not all fiduciaries are saints. Ponzi king Bernie Mads a fiduciary! There are always a few bad actors in every industry.

Knowing that an advisor with whom you are considering working is a fiduciary is an excellent place to start, though. You should still do extensive research and ask questions. Remember that the title of “fiduciary” is gained through actions, not education. You can find fiduciaries who have gone through a demanding training process to become Certified Financial Planners® (CFPs) and others who have taken tests to become registered investment advisors (RIAs). Other advisors may be fiduciaries because they serve on boards or investment committees. It’s always prudent to ask questions about your advisor’s background, education, and experience, even if they tell you they are a fiduciary.

The bottom line: While most financial professionals are hard-working, honest individuals who don’t take advantage of their clients, those designated as fiduciaries tend to be especially careful with their clients’ money. There will always be a few rotten apples who behave in ways that violate fiduciary conduct. Still, for the most part, fiduciary advisors adhere to a much higher standard of conduct.

You should always carefully research and vet anyone who will be making financial decisions on your behalf or advising you about money.

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