Financial Advisor

Financial Advisor’s New Fiduciary Duty

On June 9, 2017, the Department of Labor ruled that financial advisors must now act as a fiduciary for their clients. As always, with changes in the law, you may have questions as to what this means.

A fiduciary is a person (or organization) that owes the principal the highest legal duty of good faith and trust. They are legally and ethically bound to act in the principal’s best interest. Simply put, it means that financial advisors need to act in the best interest of the client. This means:

  • Fiduciaries must charge no more than a “reasonable” fee for his or her services.
  • A fiduciary should disclose all material facts, and must avoid lying to, or misleading, the client about the products they’re recommending.
  • They must act with the skill, due diligence and knowledge expected of someone familiar with the responsibilities of being a financial advisor.
  • Conflicts of interest must be avoided.

The results of this rule are that Financial Advisors may need to restructure fees or how they operate their investments to comply with the new rules. The question of what exactly a reasonable fee is, remains unclear and most companies will set their own internal practices.

While the fiduciary rule currently applies only to retirement accounts (including 401(k)s and IRAs), it may expand in the future. Until then, it is wise to ask if your advisor is a fiduciary regarding your other accounts.

To make sure that Financial Advisors are complying with new rules, it is most important to remember who your client is. In situations where financial advisors are looking at family plans between husband and wife or between parents and children, this can cause conflicts of interest if the advisor does not know who they are advising. While it seems like a simple concept on its face, the implications of having a fiduciary duty can be nuanced and complicated.

The Fiduciary rule may be new to financial advisors, but many people serve in a fiduciary for others.  Attorneys are always held to a fiduciary standard for their client. Powers of Attorney for Financial and Health Care decisions are held to the same standard. Guardians are fiduciaries and are overseen by the court to make sure they are acting in the best interest of their wards.

Like all new rules, it may require a period of adjustment, but it is another example of how we all need to work together in our individual fields to continue to improve upon protecting the best interests of our clients.

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