What Does Being a Fiduciary Really Mean?

The question of whether your financial advisor is a fiduciary has come up a lot in the financial media recently.  But what does that actually mean?

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 pretty straight-forward, it can be somewhat hazy to people in terms of how this relates to an advisor.  I thought it may help to provide some real world examples of what I think being a fiduciary really means.  Here is a list of attributes I believe a true fiduciary financial advisor would practice:

  • Being a fiduciary means welcoming the “tough” questions.  In my opinion, the two most important questions someone can ask a potential advisor is “how do you make money”, and “how much do the actual investment solutions cost me”.  If this isn’t crystal clear to a potential client, that person shouldn’t walk out of that advisors office, they should run.  A good advisor will make this painstakingly obvious to both prospective and current clients.  For a true fiduciary, this is not a tough question.
  • 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 sell’s a product from someone who is truly providing on-going advising and is in it with their client for the long haul.
  • Being a fiduciary means being open-minded.  Mark Andreesen, the Silicon Valley entrepreneur, says the mantra of his company is “strong opinions, weakly held”. What this means is having conviction and believing in what you are doing, but not being stubborn or unwilling to accept new data that may challenge (and perhaps change) those beliefs.  We see this all the time 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 have the courage to change tactics 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, or after they obtain their CFP 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 to better service their clientele.  A fiduciary must be a learning machine in order to deliver consistent value.
  • 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 recent blog post, I mentioned a whitepaper that Vanguard wrote on how an advisor can add value from an investment perspective.  All of those ideas are great, but is every advisor consistently doing all of these things?  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 great, 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 being a fiduciary really means.  Please feel free to contact me to let me know your thoughts, thanks.

 

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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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