What is a fiduciary?
A fiduciary is a person or legal entity; such as a bank, or brokerage firm, that has the power, and responsibility of acting on behalf of another. The person they make financial decisions for is usually called the: beneficiary, or principal. Fiduciary advisors make decisions under the pretense of situations; requiring total trust, good faith, and honesty in their clients’ financial matters.
Because fiduciaries have this unrestricted authority, they’re held to a higher standard than non-fiduciary advisors.
Fiduciary advisors are legally and ethically required to put your best financial interest before their own; when it comes to your financial planning.
An advisor who receives both a flat fee and commissions is considered fee-based. Fiduciaries must be fee-only, or fee-based. Non-fiduciaries can be commission-based or fee-based.
Common examples of fiduciary representatives:
If you agree to to assist someone in a situation where they place total confidence, and trust in you, you have a fiduciary duty to that person; in turn making you a trustee of trust, or a fiduciary representative. Anyone can be fiduciary trustee.
Corporate officers are fiduciaries for their shareholders, as are attorneys, and real estate agents for their clients. Some, but not all, financial advisors are fiduciaries.
What rights do fiduciaries have?
When you’re the beneficiary of a fiduciary relationship, you give that fiduciary discretionary authority over your assets. So, a fiduciary financial advisor can buy, and sell securities in your account, on your behalf, without needing your express consent before each trade.
Being a fiduciary is the highest standard of financial planning for others in today’s financial market; which entails always acting in your beneficiary’s best interest, even if doing so is dissimilar to yours.
For a financial advisor or banking institution this may mean recommending a product that results in a reduced, or no reimbursement benefit for them; because it’s the best option for their client.
According to the Securities and Exchange Commission, which regulates registered investment advisors as fiduciaries, fiduciary duties entail the following:
Avoiding conflicts of interest (such as when the advisor profits more if a client uses one investment instead of another or trades frequently); and disclosing any potential conflicts of interest.
Acting with undivided loyalty and utmost good faith; providing full and fair disclosure of all material facts; defined as those which “a reasonable investor would consider to be important”. Not misleading clients or using assets for the advisor’s own benefit; or the benefit of other client. This code of ethics or loyalty rather, is referred to, “as a duty to care”.
Standards or Practices of a fiduciary
Fiduciary standard vs. suitability standard
The most common difference between a fiduciary, and an advisor acting under a suitability standard is the decision making process. Fiduciaries operate under a different pretense when making decisions. Before making a recommendation, fiduciaries go through a cautious process, designed to determine their client’s best interests.
Once they make a recommendation, they discuss it thoroughly with the client; to ensure there’s no misinterpretation about the suggestion, or the fiduciary’s rationale for making it.
For advice to be considered merely “suitable,” the financial fiduciary must only have an ample reason to believe a suggestion fits the client’s financial situation, and or financial needs.
For that to be the case, an advisor must acquire sufficient information about the investment, as well as the customer’s financial situation before making any recommendations on their behalf.
These types of advisors aren’t obligated to watch clients’ accounts, or financial situations, on a continual basis. It’s very important to remember that if your advisor isn’t a fiduciary; they can steer you into products, or purchases, that put more money into their pocket instead of yours.