Are You a Fiduciary And Why Does It Matter?
What is a Fiduciary?
To put it in the simplest terms, it’s a requirement that you, as a financial adviser, put the interests of your client first and think of personal gain from the arrangement second. The lower, non-fiduciary standard of care is simply the “Suitability Standard.”
Clients seeking advice about their retirement are subject to vastly different standards of care depending upon a myriad of circumstances. But drawing the line between your gain and customer benefit has been an issue for the industry almost since its inception. The issue has been raised in Washington recently, where a debate has been ongoing over what’s known as the “fiduciary standard.”
Why This Matters
Ordinarily, when an adviser is required to put the client’s interest first, that would ordinarily be a registered investment adviser (RIA) or representative of such firm. RIAs are held to the fiduciary standard and are thus required to abide by it while dispensing advice. However, if you are a stockbroker, broker-dealer, insurance or bank representative, then you usually are not held to the same standard. Ordinarily, it means that you must provide recommendations that are merely suitable.
When Stockbrokers Owe a Fiduciary Duty
In certain circumstances, stockbrokers can be fiduciaries, too. For instance, if they have “discretion,” also known as limited power of attorney, i.e., making trades without specific client pre-approval or manage certain ERISA-type accounts, i.e., a pension plan.
What is the Difference?
The way that RIAs are compensated for their work usually comes into play as many get an annual percentage fee on the assets they manage. Other non RIAs, however, usually get commissions or, sometimes, a portion of the gain on the performance of their clients’ assets. This commission-based pay has gotten a bad rap over the last few years by investor advocates charging that some advisers may be pushing investment products that are more lucrative to them rather than benefit the client.
Most clients don’t know the difference between RIAs and all the other investment advisers they may be likely to encounter. It’s the reason why the Labor Department recently embraced an enhanced set of rules enforcing the fiduciary standard on giving retirement advice to broker-dealers and registered representatives. Under the new standard, non-RIA advisers must disclose the commissions earned and why certain investment products were chosen over others.
Some industry detractors are concerned that such regulations will make it hard for advisers to offer cost effective guidance to smaller investors. But the many supporters have waited for such expansion since the financial crisis and see the new expanded fiduciary rules as long overdue.