Fiduciary duty is an important topic of conversation, especially as debates continue over which financial professionals are obligated to uphold this standard for their clients. Simply put, fiduciary duty is a legal and ethical obligation to act in the best interests of another party. Understanding who is bound by this duty — and who is not — is essential to protecting your financial future. Taking advice from someone who does not have a fiduciary duty to you can expose you to conflicts of interest and decisions that may not prioritize your best interests. Partnering with a trusted financial advisor who upholds a fiduciary standard can give you the confidence that your financial goals are their top priority.
A fiduciary advisor can help ensure your financial strategies align with your unique needs and long-term aspirations.
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What Is a Fiduciary Duty?
A fiduciary duty is a legal responsibility to put the interests of another party before your own. If someone has a fiduciary duty to you, he or she must act solely in your financial interests. This means they can’t, for example, recommend a strategy that doesn’t benefit you, but instead provides a kickback.
You can think of fiduciary duty like the doctor-patient relationship. One party has a duty to put the other party’s interests first.
The fiduciary duty is important for guiding the actions of the professionals who deal with clients’ money. It’s also important because, when violated, it provides an avenue to legal action.
Say a financial professional who doesn’t have a fiduciary duty to you has been knowingly selling you low-performing, high-fee investments. You don’t have the legal standing that you would have if you were in the same situation with a fiduciary.
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Fiduciary Duty and Financial Services
Fiduciary duty has come up in the case of investors in fossil fuel companies like Exxon, which stands accused of neglecting its fiduciary duty to protect shareholders from the threats of climate change. It also comes up in the case of the financial planners and brokers many Americans rely on for financial advice.
These days, investment advisors are required by the Securities and Exchange Commission (SEC) to abide by fiduciary duty standards and put their clients’ financial interests ahead of their own. They make money by charging fees based on the size of the assets they manage.
Broker-dealers, however, are not bound by fiduciary duty and are only subject to rules requiring them to make “suitable” recommendations. Brokers can make money from commissions on mutual funds and other investments they sell to clients.
That means they may encourage clients to buy funds from the companies that pay the highest commission, not the funds that best suit the needs of the client. Lots of people rely on brokers for investment advice and retirement planning. Because of this, some critics say it’s time for fiduciary duty to expand to broker-dealers.
That’s why there have been calls to reform the fiduciary standard included in the landmark 1974 retirement law, Employee Retirement Income Security Act (ERISA). The Department of Labor announced a plan for expanding fiduciary duty to anyone who handles retirement accounts, whether that person is a broker or a financial advisor. Lobbyists and industry spokespeople have fought the move and the debate is still playing out.
Mary Jo White, Chair of the SEC, declared in March 2015 that she was interested in revising fiduciary duty rules to create a uniform standard that applies to broker-dealers and investment advisors.
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The Suitability Standard
While not the same as fiduciary duty, there’s also the suitability standard. The suitability standard underwent significant changes in 2020 when the SEC introduced the Regulation Best Interest (Reg BI) rule. This new requirement mandates that stockbrokers and investment dealers adhere to a best interest standard when making recommendations to clients.
While this change has raised the bar for brokers and dealers, it still falls short of the comprehensive protections offered under the fiduciary standard, which legally obligates advisors to prioritize their clients’ best interests above all else.
One area of concern under the updated rule is the recommendation of higher-cost investments. Although brokers must meet stricter disclosure requirements, they may still be allowed to suggest options that yield higher commissions for themselves, provided those recommendations align with the client’s financial needs and objectives. As the rule’s implementation and oversight continue to evolve, further clarity and stricter enforcement could address these potential conflicts of interest, ultimately shaping a more investor-friendly landscape.
Why Fiduciary Duty Matters
If you’re taking financial advice from someone who doesn’t have a fiduciary duty to you, you’re taking a risk. That’s not to say that brokers and those who aren’t bound by fiduciary standards always take advantage of their clients. But without the legal standard in place, clients face more uncertainty.
If you’re working with someone who doesn’t have a fiduciary duty to you, you have fewer legal options in the event that you discover your interests haven’t been served.
It’s always a good idea to shop around for financial professionals anyway. It’s important to read the fine print and, if you’re not getting a clear answer, ask about whether a professional you’re considering working with is bound by fiduciary duty.
When it comes to safeguarding your investments and retirement savings, it’s wise to err on the side of caution.
Bottom Line
Working with financial professionals who are not bound by fiduciary duty can leave you vulnerable to advice driven by commissions or conflicts of interest, rather than your best interests. By prioritizing professionals who uphold fiduciary standards, you can ensure that your financial goals are aligned with their recommendations, giving you greater peace of mind. Whether you’re planning for retirement, building an investment portfolio or seeking to protect your wealth, choosing a financial advisor who is legally and ethically obligated to act in your best interest is a smart move. Take the time to ask questions, understand their standards and ensure transparency in their approach.
Tips for Finding a Fiduciary
- A fiduciary advisor can help ensure your financial strategies align with your unique needs and long-term aspirations. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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