What Is a Fiduciary and Why Does It Matter?

There’s been a lot of media coverage lately regarding the Department of Labor’s (DOL) soon-to-be new rules for financial advisors to act as fiduciaries for clients, especially when dealing with specific types of retirement accounts. I’m sure the question that almost everyone is asking is “What’s a fiduciary?” followed closely by “Why does it matter?" Well, let’s explain further so everyone can understand why this new development is important.

The definition of a fiduciary is one who acts in the best interests of another. There is obviously an implied sense of trust with a fiduciary when entering into an arrangement with one. The responsibility that the fiduciary has towards the principal or beneficiary (the client) is called the fiduciary duty. (For more, see: Why the Fiduciary Standard is Important.)

Currently, in the financial advisor world, there have been two different (but not necessarily separate) standards of care when it comes to clients:

  1. The suitability standard: This says that the financial advisor can recommend that the client do something (for example, buy a certain type of investment or pay off their debts) as long as it is suitable for the client. (This recommendation may not be the best thing for the client to do, mind you.)
  2. The fiduciary standard: This is the highest standard of care that a financial advisor can apply to dealing with clients: the recommendations are to be in the absolute best interest of the client regarding the client’s specific financial situation. Extra care and prudence is needed when operating in this capacity for clients.

When you read the above standards of care, ask yourself this very important question: which of those two standards of care seems best for financial advisors to adhere to when practicing? When a financial advisor recommends you buy XYZ product for your retirement portfolio, is it because it’s suitable or is it because it's the absolute best choice for your situation? Does your adviser get a bigger commission by recommending that specific product, instead of a similar one that is less expensive to you? 

If you can’t be sure that your advisor is acting in a fiduciary capacity, it might be time to look for a new firm and advisor that always adheres to the fiduciary duty when dealing with their clients. (For related reading, see How to Find the Best Wealth Manager.)

Now that you’ve got an understanding of what you should want in a financial advisor (that is, one who always has a fiduciary duty to his/her clients) don’t just settle for someone who sometimes operates in a fiduciary capacity. Make sure that they always are acting in your best interests. Hiring the right financial advisor can make all of the difference over the long term. Now that you know that, you’re welcome!

Find an experienced financial advisor who always operates in a fiduciary capacity, works for an RIA firm, earns their money from fees (not commissions), believes in having an abundance of investment choices for clients, and has the heart and demeanor of a teacher rather than a salesperson, and chances are you’ve found the right financial advisor to help you prepare and plan for your financial goals.