What is the Fiduciary Standard and Why Do I Care?

FiduciaryThe Department of Labor recently issued a ruling about the fiduciary standard.  This ruling means that advisers who provide investment advice for retirement accounts will be subject to the fiduciary standard.  This begs the questions:  “What is a fiduciary, and what does this mean when I’m looking for a financial adviser?”

As you might note, I write most of my articles for people who want to help themselves–‘how-to’s’ of sorts.  This article will attempt to help people who believe they need to hire someone to help them with their financial planning needs.  This doesn’t purport to advise whether you should hire a planner, just to define a term that is commonly tossed about in the financial planning industry:  the fiduciary standard.

What is the Fiduciary Standard?

You may or may not have heard about the debate with regards to the fiduciary standard.   Department of Labor has recently made changes to reflect today’s financial advisory landscape. This article will take you through a quick primer on the law that created the fiduciary standard, who the fiduciary standard applies to, and how the fiduciary standard compares to what you’ll see in the marketplace. In essence, we’ll discuss what the fiduciary standard SHOULD mean to you, as the consumer of financial advice, and what you should be looking for.

The fiduciary standard was created by the Investment Advisers Act of 1940, which states that “brokers, dealers, and investment advisers when providing personalized investment advice about securities to retail customers, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Furthermore, the Securities & Exchange Commission (SEC) has determined that an investment adviser has the following duties:

  • Make reasonable investment recommendations independent of outside influences
  • Select broker-dealers based on their ability to provide ‘best execution’ of trades for accounts where the adviser can select the broker-dealer.
  • Make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation, and other factors
  • Always place client interests ahead of its own.

This seems confusing.  However, all you need to know is this:  The fiduciary standard (meaning always acting in the best interest of the client) applies if you’re a registered investment adviser.

Who’s a registered investment adviser?

Great question. The answer lies in being able to ask a question yourself. It’s a simple question you can ask of any financial planner or adviser.  The question is:

  • Can I see your ADV?

The Form ADV is the form that investment advisers use to register with either the SEC or the state securities authorities. Simply put, the ADV discloses a LOT about an adviser’s business, including where the adviser works, how they’re compensated (they’re forced to disclose whether they’re paid commissions or fees, but not how much their commissions are), education history, conflicts of interest, etc.

Every registered investment adviser must have an ADV on file. It’s that simple. You can read the ADV for yourself.  Once you have, you can make an informed decision about working with them. In fact, an investment adviser must issue an ADV to you when you first enter into a contract, and every year afterwards. Each year, the ADV must clearly show what material changes have been made, so you don’t have to wade through pages of legalese to figure it out.

If the person doesn’t have an ADV, they’re not working for a registered investment adviser. That doesn’t mean they can’t be professional, nice, and look out for your best interests. However, it means that the law doesn’t require them to put your interests above their own.

The Bottom Line:

Isn’t that the fundamental question when looking for a financial adviser:

To find a financial professional who is legally bound to put your interests above their own, and who is required to disclose any conflicts of interest they may have?

We can discuss broker-dealers, insurance agents, and the other players in the financial advisory landscape. However, once you get past the fundamental question, it all appears to be semantics, so I’ll stop here. Please feel free to ask me any questions about the difference between registered investment advisers, broker-dealers, and other financial professionals.  However, I want to keep this article simple.  I wrote this blog post to inform you what the fiduciary standard is, and how to look for it. You should look for and expect any adviser to whom you are willing to pay money, to uphold this standard.

As always, this blog serves to answer your questions and address concerns.  If you like this blog, please forward it on to other people who may benefit.  If you have issues or concerns, or, feel free to reach me through my website, or via email.  In the meanwhile, take charge of your life!

About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and tax professional. His firm, Westchase Financial Planning, focuses on the unique financial planning needs of servicemembers and families looking to separate or retire from active duty.If you’d like to learn more about Forrest or his services, please check out the About Forrest page at the top of this article.
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One Response to What is the Fiduciary Standard and Why Do I Care?

  1. Pingback: Weekend Wrap-up: Military Personal Finance Articles You Should Read (4/1-4/7) | Military in Transition

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