I’ve noticed recently the word “Fiduciary” has been tossed around in various contexts and statements, for example:
- I am a fiduciary
- It’s my fiduciary responsibility
- I acted as a fiduciary
A couple of times in the last few weeks I have heard these phrases and I was not completely sure the individuals actually knew what the word meant. Sometimes it’s being used as a noun and sometimes as adjective.
I Googled it, here is what is listed:
involving trust, especially with regard to the relationship between a trustee and a beneficiary.
"the company has a fiduciary duty to shareholders"
held or given in trust.
(of a paper currency) depending for its value on securities (as opposed to gold) or the reputation of the issuer.
noun: fiduciary; plural noun: fiduciaries
- a trustee.
late 16th century (in the sense ‘something inspiring trust; credentials’): from Latin fiduciarius, from fiducia ‘trust,’ from fidere ‘to trust.’
Cornell Law defines Fiduciary Duty:
The highest standard of care
The person who has fiduciary due is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary.
As a result, potential beneficiaries can have great confidence in seeking out a fiduciary.
One of my favorite industry author’s, Michael Kitces, wrote an article in January of 2017 regarding this very topic on the 4 different types of fiduciary financial advisors. I won’t repeat his words of wisdom, but the bottom line is, you should expect the following from a financial planner that is a fiduciary:
We are subject to a duty of loyalty and due care, and
We should always act in the best interest of our clients
Here’s where it gets a little confusing because aren’t all financial advisors subject to the fiduciary rule? No.
Financial advisors are currently regulated under one of the following standards of conduct:
Investment advisors registered with the SEC or state regulated are indeed fiduciaries. They are subject to the above and can be sued in a court of law if they breach those responsibilities
Other’s that provide investment advice (such as stockbrokers, broker-dealer reps, and insurance agents) who are regulated by their state insurance regulators or FINRA (Financial Industry Regulatory Authority) are subject to what is called suitability. What does this mean? Well the product being recommended has to be suitable based on questionnaires completed by clients or documented by the advisor, but believe it or not, they are not required to act in their client’s best interest. Now that does not mean anyone who isn’t a fiduciary is doing something wrong, they just conduct business by a different standard.
The two worlds can live together and benefit clients. For example, let’s say I recommend, as a fiduciary, that you should have a life insurance policy. I can’t write the policy because insurance companies pay a commission to the writing agent, which could create a conflict of interest. But I can collaborate with an agent who can write it.
In the above case, I’ve acted as the fiduciary and the insurance agent has written the suitable policy for you. I do not get a referral fee or paid by the insurance agent, instead I get paid directly from you, the insurance agent gets paid for writing the policy directly from the insurance company that offers the policy. In this case I’m there to protect you and make sure that it’s the best product for you – I have no possible conflict, but someone needs to help us implement the recommendation.
As I was writing the blog this weekend and re-listening to the most recent Wine and Dime release Episode 14 – with First Ascent CEO Scott MacKillop, I was reminded of a blog he published earlier this year called, “Ignore the Gurus: Part 1.” As a fiduciary, it is our job to make sure we help you ignore the gurus and instead focus on your circle, your family, and your individual situation.
Doing what is good for the majority, may not be what is good for you individually, so each situation needs to be reviewed and analyzed separately in order to avoid undue hardship being placed on you in the future; which of course could trickle down to others.