A fiduciary is an individual, financial professional or company who has the utmost duty to put others’ interests ahead of their own. A fiduciary duty means that this person must act with prudence and honesty in dealing with clients’ finances.
Under the Investment Advisers Act of 1940, anyone who provides advice about investments for compensation, direct or indirect, is considered an investment adviser and thus held to a fiduciary standard—exclusive of any other designation (e.g., insurance agent).
Investor’s best interests
The Securities and Exchange Commission (SEC) adopted rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act to be held to a best-interests standard when providing personalized investment advice about securities to retail customers. Stock brokers must now legally put their clients’ best interests first, whether the advice is directed to investing in stocks, bonds or mutual funds. In this instance, compensation received from the sale of a security will not affect a broker’s or adviser’s duty to his client.
401(k) plan advisors
Currently, there is no Securities and Exchange Commission (SEC) law which defines a fiduciary standard for investment advisors who provide asset management services to institutional clients, such as qualified retirement plans and pension funds. Some states have passed legislation raising the bar for their personal advisors.
The Department of Labor (DOL) recently passed a law that is very close to the fiduciary standard; it is called PTE 2020-02, Improving Investment Advice for Workers and Retirees. Under PTE 2020-02, financial institutions must:
- investigate and evaluate investments, provide advice and exercise sound judgment in a manner similar to fiduciaries;
- act with undivided loyalty to retirement investors when making recommendations
- charge no more than reasonable compensation and comply with federal securities laws regarding “best execution” and
- avoid misleading statements.
The employer sponsor for these plans must be a fiduciary. And many, if not most, advisors who work with 401(k) retirement plans swear a fiduciary oath to the plan participants. If you are not sure, ask your human resources representative.
The Securities Industry and Financial Markets Association (SIFMA) has proposed five new “Client Interest Principles” that address issues related to conflict of interest in financial advisory agreements. These principles are designed to guide all types of relationships between broker/dealers and retail investors – whether one-on-one tailored advice from an investment advisor at a full-service brokerage firm or a retirement plan participant working with a broker-dealer that provides her with access to an online self-directed brokerage platform.
What is a fiduciary financial advisor?
A financial planner is an investment advisor who provides advice to individuals and families about investments for compensation, direct or indirect. He is held to a fiduciary standard and must put clients’ interests first, whether or not his advice is directed to investing in stocks, bonds or mutual funds. In this instance, the planner’s compensation from selling a security will not affect his duty to his client.
Financial planners who are registered investment advisors, or RIAs, are held to a fiduciary standard. In fact, by law all investments they offer must be in the best interest of their clients. In most cases, these professionals will charge a fee based on a percentage of assets under management or as a flat hourly rate.
The planners who are not registered investment advisors may be held to a different standard than fiduciaries. In other words, insurance agents, bank trust departments, stock brokers may not be fiduciaries. If they are not, then the only thing that would hold them to a fiduciary standard is his or her own code of ethics.
For example, she may follow the CFP Board of Standards rules of conduct. Another popular designation comes from the CFA Institute. Ask your financial advisor about her code of ethics and professional conduct when practicing as an investment advisor. If they are not a fiduciary, they may not have to put your interests first.
How does it work?
When an individual becomes a client of a financial planner, he or she will often complete a detailed questionnaire that helps determine how much the client can afford to invest and how much risk they should assume. The next step would be to develop a comprehensive financial plan based on this information. The end result of the process is an investment strategy customized for each client’s individual needs and goals.
The bottom line
The bottom line is that if you pay someone who provides financial advice you should expect him or her to act as a fiduciary. Whether it be for one-on-one tailored advice from an investment advisor at a full-service brokerage firm, a retirement plan participant working with a broker/dealer that offers her access to an online self-directed brokerage platform, or some other relationship. If you are not paying for the advice then there is no standard that would hold an individual to any specific standard of care over any other.
If you have further questions about financial planner or investment advisor being held to a fiduciary standard do not hesitate to ask any of our Fiduciary Financial Advisors at A&I Financial Services LLC. You may also read about A&I’s process & promise here.