What is a “Fiduciary”?
There is a lot of confusion surrounding this concept but it is a very important concept to understand. In the legal sense, a fiduciary is someone who has the legal authority to act for another. Think trustee of a trust, executor of estate, an agent under a power of an attorney or a guardian for a child. The job of this type of fiduciary often includes the management of the financial affairs of another. Interesting sidebar: a tax return for a trust or estate is called a ‘fiduciary return’.
The broader concept of fiduciary is one of “fiduciary duty,” which speaks to the ethical responsibility involved in certain relationships. Someone acting as a fiduciary has the duty to act in someone else’s “best interests”. This means putting someone else’s best interests ahead of his or her own. Think about this. What if a car salesman had to put your best interests ahead of his or her own?
A Certified Financial Planner™ professional is subject to a set of professional standards that are overseen and enforced by the CFP® Board of Standards. Rule 1.4 of these standards reads, “A CFP® professional shall at all times place the interest of the client ahead of his or her own.” This couldn’t be stated any clearer. That said, it is vital for you to understand that this standard only applies when the CFP® professional is providing financial planning services. If something is being done outside of the scope of a financial planning engagement, one could argue that the professional standard need not apply.
Investment Advisers are people who engage in the business of advising others about investments. Investment Advisers (RIA’s) and their representatives (RIA Representatives) are subject to a key federal law, the Investment Advisers Act of 1940. The anti-fraud provisions of this act (and most state laws) impose the duty to act as a fiduciary in dealings with clients. RIA’s and their representatives are also required to make unbiased recommendations based on a reasonable understanding of a client’s financial situation and objectives.
I have the duty to act as a fiduciary:
- I am both a Certified Financial Planner™ professional and an Investment Adviser Representative.
- As a Certified Financial Planner™ professional, I must act with the duty and care of fiduciary while providing financial planning services. If I do not, I am subject to the enforcement actions of the CFP® Board of Standards (i.e., I could lose my license).
- As an RIA Representative, I must act with the duty and care of a fiduciary when advising others about investments and in all dealings with investment clients. If I do not, I will be subject to enforcement by regulatory agencies, the State of Wisconsin and the federal government.
Heads Up! Who is NOT subject to a fiduciary duty?
- Insurance agents who are not Investment Adviser Representatives.
- Stockbrokers who are not Investment Adviser Representatives.
- CFP® professionals providing non-financial planning services who are not Investment Adviser Representatives.
Always check the disclosures. If someone is an Investment Adviser Representative, it should be disclosed on everything they do. For me, it is disclosed at the bottom of my website, on my business card and letterhead, on all marketing materials and on almost everything else that I do.
To check up on the professionals you work with, see my blog article, “Who Can You Trust.”
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