Acting as a Fiduciary: What Does It Really Mean?

As you may have seen, the Department of Labor has proposed to again delay the implementation of the fiduciary rule, which will require advisors to put clients’ interests ahead of their own when managing retirement accounts.  While the rule isn’t perfect, it’s a step in the right direction, particularly if it’s expanded.  But what is a fiduciary anyway, and why should you care?

As defined by the Cornell University Law Review, a fiduciary duty is “…a legal duty to act solely in another party’s interests.  Parties owing this duty are called fiduciaries…Fiduciaries may not profit from their relationship with their principals unless they have the principals’ express informed consent.  They also have a duty to avoid any conflicts of interest between themselves and their principals or between principals and the fiduciaries’ other clients.”

While this definition is straight-forward, it can be somewhat hazy in terms of how this relates to a financial advisor.  I thought it may help to provide some examples of what I think acting as a fiduciary really means.  You won’t find these in a law review, but here is a list of real-world attributes I believe a true fiduciary financial advisor should practice:

  • Being a fiduciary means welcoming the “tough” questions.  In my opinion, the two most important questions someone can ask a potential advisor is “in what ways are you compensated”, and “how much will the actual investment you recommend cost me”.  If this isn’t crystal clear, you shouldn’t walk out of that advisor’s office, you should run.  A good advisor will make this painstakingly obvious to both prospective and current clients.  The true fiduciary advisor welcomes the opportunity to speak about costs.
  • Being a fiduciary means putting the client’s interest first in all circumstances.  The proposed fiduciary rule will apply to retirement accounts such as IRA’s and 401(k)’s, but will not apply to personal (i.e., taxable) accounts.  Registered Investment Advisors are held to a fiduciary standard on all accounts they manage, while brokers and others may not be.  Understand what responsibility an advisor operates under before signing anything.
  • Being a fiduciary means being in it for the long haul.  There are many people that call themselves “advisors”, but in some cases, they will sell a product that requires no ongoing advising.  It’s important to distinguish between someone who sells a product from someone who is truly providing on-going advising and is in it with their client for the long term.
  • Being a fiduciary means being open-minded.  Mark Andreesen, the Silicon Valley entrepreneur, says the mantra of his company is “strong opinions, weakly held”.  This means having conviction and believing in what you’re doing, but not being stubborn or unwilling to accept new data that may challenge (and perhaps change) those beliefs.  We observe this often with advisors touting the benefits of high-cost active management, even though the evidence says otherwise.  A fiduciary advisor should continue to expose themselves to new ideas and data, and then have the courage to change strategies if enough reliable evidence comes along.
  • Being a fiduciary means continually sharpening your sword.  An advisor can’t continue to properly service his or her clients if they stop learning once they graduate college, after they obtain their CFP, CPA or CFA, or even after they become financially successful.  Given tax law changes, new academic research, better technology, etc., there is no shortage of areas for an advisor to learn more about.  A fiduciary advisor must be a learning machine to deliver consistent value to their client’s.
  • Being a fiduciary means having multiple arrows in your quiver.  The great Charlie Munger, Vice Chairman of Berkshire Hathaway, is fond of the saying “To the man with only a hammer, every problem looks like a nail”.  When advisors are financially incentivized to sell certain products that will pay them more (most notably certain annuities, insurance products, and load mutual funds), they attempt to solve every problem with that product.  A fiduciary advisor should have many tools at their disposal, and only use those that best meet their client’s needs, not their own.
  • Being a fiduciary means doing what you say you’ll do.  In a past blog post, I mentioned a whitepaper that Vanguard wrote on how an advisor can add value from an investment perspective.  All of those ideas mentioned are important, but is every advisor consistently delivering these services to their clients?  Are they also considering your other financial planning areas such as estate planning, taxes, insurance, etc.?  In my experience, many advisors don’t.  A fiduciary will explain at the onset of a client relationship how they add value, and they will consistently deliver on that promise.  Fiduciaries strive to be held accountable by their clients.

While the textbook definition of a fiduciary is helpful, a fiduciary financial advisor should strive to go the extra mile in order put their clients’ interests first.  While this list is far from complete, I believe it’s a good start for defining what acting as a fiduciary really means.  Please feel free to contact me to let me know your thoughts, thanks.

 

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.  Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.

About Patrick Runyen

As a Wealth Manager at Independence Advisors, Patrick Runyen, CPA/PFS, CFP® works closely with clients to implement wealth management solutions. He leverages his technical financial planning and consulting experience to assist clients with investment counseling, retirement planning, estate planning, wealth enhancement, asset protection, tax planning, and other personally significant financial decisions. CLICK HERE TO ASK PAT.

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