What is the Fiduciary Standard and Why Do I Care?

The Department of Labor is expected to issue its long-awaited fiduciary rule, which means that advisers who provide investment advice for retirement accounts and IRAs will now be subject to the fiduciary standard.  Which begs the questions:  “What is a fiduciary, and what does this mean when I’m looking for a financial adviser?”

As you might note, most of my articles are aimed for people who are looking to help themselves–‘how-to’s’ of sorts.  This article is aimed at people who believe they need to hire someone to help them with their financial planning needs.  This doesn’t purport to advise whether you should hire a planner, just to define a term that is commonly tossed about in the financial planning industry:  the fiduciary standard.

You may or may not have heard about the debate with regards to the fiduciary standard, and the Department of Labor’s attempt to make changes to reflect today’s financial advisory landscape. This article will take you through a quick primer on the law that created the fiduciary standard, who the fiduciary standard applies to, and how the fiduciary standard compares to what you’ll see in the marketplace. In essence, we’ll discuss what the fiduciary standard SHOULD mean to you, as the consumer of financial advice, and what you should be looking for.

In the beginning….

The fiduciary standard was created by the Investment Advisers Act of 1940, which states that “brokers, dealers, and investment advisers when providing personalized investment advice about securities to retail customers, shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.”

Furthermore, the Securities & Exchange Commission (SEC) has determined that an investment adviser has the following duties:

  • Make reasonable investment recommendations independent of outside influences
  • Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
  • Make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation, and other factors
  • Always place client interests ahead of its own.

Great. I’m confused. Well, all you need to know is that the fiduciary standard (meaning always acting in the best interest of the client) applies if you’re a registered investment adviser.

Who’s a registered investment adviser

Great question. The answer lies in being able to ask a question yourself. It’s a simple question you can ask of any financial planner, adviser, or anyone else who is interested in establishing a relationship with you and your money. The question is:

  • Can I see your ADV?

The Form ADV is the form that investment advisers use to register with either the SEC or the state securities authorities. Simply put, the ADV discloses a LOT about an adviser’s business, including where the adviser works, how they’re compensated (they’re forced to disclose whether they’re paid commissions or fees, but not how much their commissions are), education history, conflicts of interest, etc.

Every registered investment adviser must have an ADV on file. It’s that simple. You can read the ADV and make your own decision as to whether or not you want to do business with them. In fact, an investment adviser must issue an ADV to you when you first enter into a contract, and every year afterwards. Each year, the ADV must clearly show what material changes have been made, so you don’t have to wade through pages of legalese to figure it out.

If the person doesn’t have an ADV, they’re not working for a registered investment adviser. That doesn’t mean they can’t be professional, nice, and look out for your best interests. However, it means that the law doesn’t require them to put your interests above their own. Isn’t that the fundamental question:

To find a financial professional who is legally bound to put your interests above their own, and who is required to disclose any conflicts of interest they may have?

We can go into a lengthy discussion about broker-dealers, insurance agents, and all of the other players in the financial advisory landscape. However, once you get past the fundamental question, it all appears to be semantics, so I’ll stop here. Please feel free to ask me any questions you want if you want to go down the rabbit hole of the difference between registered investment advisers, broker-dealers, and other financial professionals.  However, I want to keep this article simple. This blog post was written to inform you, the greater audience, of what the fiduciary standard is, and how to look for it. You should look for and expect any adviser to whom you are willing to pay money, to uphold this standard.

In the next few weeks, I’ll outline some things you should consider when you’re pondering the decision on whether or not to hire a financial planner.

As always, this blog serves to answer your questions and address concerns.  If you like this blog, please forward it on to other people who may benefit.  If you have issues or concerns, or if you have a question you’d like me to answer, please feel free to contact me.  You can reach me through my website, or via email.  In the meanwhile, take charge of your life!

About the author

Forrest Baumhover

Forrest Baumhover joined Lawrence Financial Planning in 2018 after a rewarding 24-year Navy career. He holds a B.S. in English from the United States Naval Academy and an M.B.A from Old Dominion University. Forrest has been a CFP® professional since 2015. He is also enrolled before the IRS as a tax practitioner.

As a veteran and a financial planner, Forrest understands the difficulties of being financially prepared for the unexpected. His personal experience in helping sailors resolve their own financial challenges inspired him to become a financial planner.

Forrest has been quoted in USA Today, Forbes.com, Christian Science Monitor, Business Insider, and other industry publications.

Originally a native of Dade City, Florida, Forrest has lived in Tampa since 2014. In his spare time, he volunteers as a transportation specialist, transporting his three children from activity to activity.

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