What Does Fiduciary Mean? Should You Care?
Fiduciary duty? If you are not exactly sure what that means, you are not alone. But, how can a concept that should be so important for anyone seeking help with retirement, investments, savings and all personal finance matters be so little known and so little used?
How do you even pronounce fiduciary?
Pronounced: fid — oooooo — see — airy, a fiduciary is an individual in whom another has placed the utmost trust and confidence to manage and protect property or money.
Most importantly, as part of this relationship, one person has an obligation to act for another’s benefit.
The term fiduciary derives from the Latin fiducia, meaning “trust” and it means that a person acting as a fiduciary for you has a legal or moral obligation to put your needs and interests before any needs or interests of themselves.
The word fiduciary is both a noun and an adjective.
- When using “fiduciary” as a noun, you might say, “my financial advisor is a fiduciary.” Fiduciaries are often trustees, financial advisors, estate planners or guardians.
- When using “fiduciary” as an adjective, you might say: “my financial advisor has fiduciary responsibility.”
When you employ a financial advisor who has fiduciary duty or fiduciary responsibility, that means that all of their decisions and recommendations are based on fulfilling your interests. A fiduciary financial advisor will not sell you an investment because they get a big commission, they will only sell you investments that make sense for your financial goals. Furthermore, fiduciary financial advisors must disclose any potential conflicts of interest (like sales commissions).
The best online fiduciary definition comes from the Cornell University Law School. They say:
“A fiduciary duty is a legal duty to act solely in another party’s interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. 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 their principals and the fiduciaries’ other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system.”
What is fiduciary relationship?
Fiduciaries work for the benefit of the individuals they serve, they are responsible for avoiding “self-dealing,” or conflicts of interests in which the potential benefit to the them is at odds with what is best for the person who trusts in them.
A trustee of a trust is a common type of fiduciary, however, fiduciaries can include people and companies such as banks, title firms, attorneys, stock brokers and financial advisors.
Should You Look for a Fiduciary Financial Advisor?
A financial planner has the fiduciary duty to provide advice and investment recommendations that are in the best interest of his or her clients.
While it is clear that there are benefits to working with a fiduciary advisor, the downside is that they might be more expensive than other kinds of advisors. Fiduciary advisors are usually fee only advisors, meaning you pay for the services out of pocket instead of letting the advisor earn money from commissions.
You can learn more about the pros and cons of fee based advisors in this article: “Fee Only Financial Planners versus Advisors Paid on Commission.”
Who Offers Fiduciary Responsibility?
When it comes to serving the best interests of their clients, some financial planners and investment advisers are subject, by law, to the legal standard of fiduciary duty.
This legal obligation originates from certain federal statutes, most notably the Investment Advisers Act of 1940, a section of which generally prohibits an adviser from engaging in any practice that is fraudulent, deceptive or manipulative, according to the The Institute for the Fiduciary Standard.
Investment advisors typically carry Series 65 or Series 66 licenses, which are competency examinations administered by the Financial Industry Regulatory Authority (FINRA) on behalf of the North American Securities Administrators Association.
These licenses are required for anyone who intends to provide any kind of financial advice or service on a non-commission basis. Financial planners and advisers that provide investment advice for an hourly fee also fall into this category.
The exams focuses on key topic areas that are important for an adviser to know when providing investment advice, including retirement planning, portfolio management strategies and fiduciary obligations.
One particular area of the examination requires prospective advisers to know important laws, regulations and guidelines, including prohibition on unethical business practices.
Why is fiduciary duty important
Fiduciary responsibility is vitally important when entrusting a financial planner to manage your assets. This becomes especially as you near retirement age.
After all, it’s your wealth that’s at hand. And so finding that right person or institution to preside over your assets in a way that’s in your best interests and personal benefit is essential to the security of your retirement.
To ensure your finances are in the right hands, don’t be afraid to ask advisers key questions, including if they are a fiduciary full-time—some may only be fiduciaries part-time—what their licensing background is, what types of clients they generally work with and how they work with them.
Asking advisers about their fee structures and how they are compensated should also be considered, too. Fee-based advisers might charge a combination of a flat fee plus a commission, whereas commision-based advisers might have a conflict of interest since they are paid based on the products they sell to you.
“If the adviser is paid based on commission, ask how he or she manages and discloses this conflict with you,” says Judy McNary of Broomfield, Colorado-based McNary Financial Planning, LLC. “If you are not comfortable with the answer, seek a different adviser. After all, it’s your money!”