What is a Fiduciary?
Imagine you are finally taking the plunge and going sky-diving, you’ve worked up the nerve and you are getting ready to jump out of the plane. Once you are up in the air, you find out the instructor jumping with you actually gets paid more, the higher risk he takes. He plans on pulling the parachute just a little bit closer to the ground than he should because it will benefit him, and the risk it puts on you is not that important. While your finances may not be a life or death situation such as this, they are paramount to your livelihood and being advised by someone not looking out for you and your best interests can feel almost as scary as the parachute cord not being pulled when it should. In the world of finances a fiduciary is the word you want to hear when searching for an advisor who will act on your behalf with your best interests at heart.
What is a Fiduciary?
In legal terms, a fiduciary is an individual or organization that has taken on the responsibility of acting on behalf of another person or entity with utmost honesty and integrity. For example, bankers, attorneys and officers of public companies are all fiduciaries, meaning they must act in the best interest of their customers, clients or shareholders.
If your financial advisor does not have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission over ones that would be the best fit for you, which could cost you more.
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.
Fiduciary financial advisors must:
Put their clients’ best interests before their own, seeking the best prices and terms.
Act in good faith and provide all relevant facts to clients.
Avoid conflicts of interest and disclose any potential conflicts of interest to clients.
Do their best to ensure the advice they provide is accurate and thorough.
Avoid using a client’s assets to benefit themselves, such as purchasing securities for their own account before buying them for a client.
Fiduciary Duty Vs. Suitability Rule
Some financial professionals such as investment brokers and insurance agents aren’t bound by fiduciary duty. Instead, they’re only required to fulfill a suitability obligation. While fiduciaries must put their clients’ best interests before their own, financial professionals who adhere to the suitability standard must only provide suitable recommendations to their clients.
Suitability Standards:
Recommendations must be suitable for the client
Less strict rules regarding disclosure of conflicts of interest
May be loyal to the broker-dealer, not necessarily the client
If you were not aware of what a fiduciary is, you are not alone. Studies have shown that approximately 34% of people are not aware of the meaning. Now that you know, you can see why it is key to ensure the financial professional you are working with follows the fiduciary standard. When it comes to managing your money it is crucial to find someone you can trust. At R M Nelson Law, Bob Nelson has been counseling and advising northeast Ohioans with their estate plans, and estate and trust administration for more than 40 years. It doesn’t take a legal obligation for R M Nelson to have your best interests at heart, but it does provide that much more security. Call them today at 440.653.5388 to get started with a consultation.
