Is Your Financial Adviser a Fiduciary? What Does That Mean?
To break it down, it’s where your financial adviser puts your interests ahead of his or her own. It is the same duty that a trustee owes a trust beneficiary and an attorney owes a client. Investment advice not requiring a fiduciary duty must simply be “suitable.”
When you seek advice about your retirement, you are subject to vastly different standards of care depending upon many different circumstances.
But differentiating between benefits to the customer and gains for the adviser has been an issue for the industry since the beginning. This is an that’s been raised recently in Washington, D.C., where there has been a debate about the “fiduciary duty.”
Why This Is Important
Normally advisers who are required to consider the client’s interest first are considered to be registered investment advisers (RIAs). RIAs are held to the fiduciary standard, so they must give advice while also abiding by that standard. However, you might be surprised to learn that your stockbroker, broker-dealer, insurance or bank representative are are not held to the same standard. Ordinarily, it means that they must recommend just suitable transactions. If they do not recommend an investment, then it need not even be suitable!
When Stockbrokers Owe a Fiduciary Duty
In some instances stockbrokers can also be fiduciaries. For example, if they have discretionary authority over your account, a/k/a limited power of attorney, i.e., or managing a pension account.
What is the Difference?
The way that RIAs are compensated usually means a percentage of the assets they manage, i.e., 1%. But other non-RIAs often get commissions or, sometimes, a portion of the gain on clients’ asset performance. Investor advocates have given commission-based pay a bad name over the past couple of years because they’ve asserted that some advisers could potentially push investments that are more lucrative for them than you. Certain products can pay up to seven times other products.
You are not alone if you do not know the difference between RIAs and all the other financial advisers you may choose to consult. It’s precisely this reason that the Labor Department has proposed an enhanced set of rules enforcing the fiduciary standard to broker-dealers and registered representatives giving advice on retirement accounts. Under the new standard, non-RIA advisers must disclose the commissions they earned and state why certain investment products were chosen over others.
Some financial services industry groups are concerned that such regulations will make it hard for advisers to offer cost effective guidance to smaller investors. However, supporters, such as investor advocates, have waited for such protections since the financial crisis and see the newly expanded fiduciary duty as long overdue.