Fiduciary has become a hot button word in the financial industry. What makes an advisor a fiduciary? Is being a fiduciary better for the client? What about for the advisor?
To make matters more confusing, “anyone can call themselves a fiduciary,” says Blaine Aikin, executive chairman and fiduciary expert at Fi360, a fiduciary education and training company. However, if you do call yourself a fiduciary, there are certain codes of conduct and ethical standards you must adhere to.
Here we talk about the requirements to call yourself a fiduciary and the different types of fiduciary financial advisors, including:
— Fee-only fiduciaries.
— Certified financial planner fiduciaries.
— Registered investment advisor fiduciaries.
— Retirement advisor fiduciaries.
— Voluntary fiduciaries.
The Requirements to Be a Fiduciary
“The legal obligations associated with being a fiduciary are based upon trust law; the professional acts as a ‘trustee,’ and the client can be thought of as the ‘trustor,'” Aikin says. “Being a fiduciary is all about being legally accountable to the client.” Fiduciaries are required to adhere to professional practices, called fiduciary principles, that make them worthy of clients’ trust.
“A fiduciary is someone (individual or institution) that has the legal responsibility and authority to act in the best interest of another,” says Billy Lanter, a fiduciary investment advisor at Unified Trust.
“From a practical standpoint, almost anyone can act as a fiduciary,” he says. Technically, all you’d need to do is act in the best interest of another. A mother who skips a work function to watch her daughter sing is, in a sense, acting as a fiduciary. But this does not mean she can start holding herself out as “mama fiduciary.”
“There are restrictions and requirements to actually call oneself a fiduciary,” Lanter says. These restrictions can be incredibly nuanced” because “the scope of a fiduciary role can be holistic or quite narrow, he adds.
For instance, brokers are not legally held to the fiduciary standard , while registered investment advisors are. Since a lot of financial advisors are registered as both an RIA and a broker, they may not act as a fiduciary 100% of the time, says Kyle Ryan, executive vice president of advisor sales at Personal Capital Advisors.
When an advisor does call himself a fiduciary, however, the requirements are clear: He has the legal obligation to act in his clients’ best interest at all times, disclose fees and eliminate or disclose any conflicts of interest, Ryan says.
To be a fiduciary advisor, you must also be fee-only or fee-based.
“An advisor who is solely commission based is not a fiduciary advisor,” Lanter says.
Fee-Only Fiduciary Advisors
“While there isn’t a universally accepted definition of fee-only, the basic concept is that the fee-only fiduciary only receives compensation directly from the client for their services,” Aikin says. “They do not receive sales-related compensation from their employer or third parties, like fund companies.”
Their fee can be a flat rate, an hourly fee or charged as a percentage of assets under management, AUM. Not all fee-only financial advisors are fiduciaries, nor are all fiduciaries fee-only advisors.
Fiduciaries can also be fee-based. In this case, “the advisor may collect a commission on some products but is also providing advice for a direct fee,” Ryan says. This hybrid approach is common among broker-dealers who are not fiduciaries.
If a fiduciary does receive commissions, “they must disclose and manage their conflicts of interest in a manner that allows them to fulfill their fiduciary obligations to the client,” Aikin says.
Another type of fiduciary is the certified financial planner fiduciary. CFPs are held to the fiduciary standard when they are providing financial planning or engaged in the elements of financial planning. This fiduciary standard includes a duty of care, duty of loyalty and duty to follow your client’s instructions. According to the CFP Board, its fiduciary requirement is designed to be “broadly applicable yet business model-neutral.”
Simply being a CFP does not make you a fiduciary. A CFP who is not providing or engaging in financial planning is not required to act as a fiduciary. But when a CFP does engage in or provide financial planning services, she must be wholly a fiduciary, whether she is providing investment advice, retirement planning or tax advice. All advice must be given with the client’s best interest as the priority.
Registered Investment Advisor Fiduciaries
Unlike CFPs, registered investment advisors are always fiduciaries in accordance with the Securities and Exchange Commission’s Investment Advisers Act of 1940.
The act requires “advisors to be clear and transparent with clients on what they are doing, charging, and (disclose) any potential conflicts of interest as it relates to investment advice,” Ryan says.
While the act does not explicitly say RIAs are fiduciaries, the U.S. Supreme Court ruled that this effectively means RIAs are fiduciaries.
The caveat to the SEC fiduciary requirement is that it doesn’t expressly forbid advisors from engaging in conflicts of interest; it simply requires that advisors disclose them on Form ADV if they exist. Like all advisors, what RIAs cannot do is attempt to defraud, deceive or manipulate clients.
Retirement Advisor Fiduciaries
The Department of Labor has its own fiduciary requirement. The DOL fiduciaries provide investment advice to retirement investors, including 401(k) plan participants or individual retirement account owners, Ryan says.
The DOL fiduciary rule applies to any advisor giving retirement advice. As long as the advice that is given is tied to a retirement account, the DOL says you must act as a fiduciary. If you start advising on your client’s nonretirement account, however, the DOL no longer cares if you are a fiduciary or not.
That said, when operating under the DOL fiduciary rule, advisors must adhere closely to the fiduciary standard. This means no conflicts of interest, including in your pay structure and providing the best advice in accordance with your client’s best interest.
The last type of fiduciary is the voluntary fiduciary who is not necessarily registered with the SEC or DOL but has pledged to adhere to the fiduciary standard. These advisors voluntarily take a fiduciary oath, often as part of a professional designation or certification.
Certain professional designations, such as the Accredited Investment Fiduciary (AIF) “demonstrate an advisor’s commitment to and understanding of a fiduciary rule,” Lanter says.
The AIF training teaches advisors how to serve their clients as fiduciaries while growing their business.
Advisors may also pledge to be fiduciaries with fee-only organizations like the National Association of Personal Financial Advisors, which requires members to take a fiduciary oath in addition to using a fee-only compensation model.
“It’s important to note that most professional standards do not carry the force of law,” Aikin says. “They are obligations associated with the right to use the professional mark of the designation and are enforced by the organization that created the designation. They also typically apply only to the conduct of the individual who has earned the designation, not the professional’s employer.”
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