What is a Fiduciary?
The different types of fiduciary financial advisors
A fiduciary is an organization or a person whose duties must include acting in good faith and trust to another person. Most often involving finances, a fiduciary is bound ethically to act in that person’s best interests. They are expected to handle the assets of another person to benefit that person and not for their own personal profit. The “prudent person standard of care” details the actions a fiduciary must take, acting solely in the beneficiaries’ best interest. The responsibilities of a fiduciary are not only legal, but ethical as well.
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Generally, financial advisors fall into one of four types of fiduciaries:
Security and Exchange Commission (SEC) Fiduciary
An SEC fiduciary is a registered investment advisor, or an RIA. RIA’s are registered through a state or through the SEC . During the registration process, the duties of this type of fiduciary are outlined under the Investment Advisers Act of 1940 in Section 206 and applies to the investment management and advice provided by the RIA. This act states it is unlawful for an advisor to directly or indirectly defraud any client or prospective client, engage in any fraudulent, deceptive, or manipulative actions and practices, or sell/purchase any security from a client without obtaining consent from the client. You can view the Act in its entirety by clicking here.
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Department of Labor (DoL) Fiduciary
A DoL fiduciary applies to the investment advice given at any time to a retirement investor. When a DoL fiduciary provides advice to a client, it must be in the client’s best interest, and not for the benefit of the advisor. These guidelines pertain to retirement accounts such as 401k, IRAs, employer retirement plans, and also apply to annuities associated with retirement accounts. Another significant aspect of a DoL fiduciary is transactions involving variable compensation can be reviewed to uphold this best interest standard.
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Certified Financial Planner (CFP) Fiduciary
The CFP fiduciary regulations are directed towards CFP’s who are providing a consumer with financial planning advice. You can also be a CFP and not be a fiduciary. These guidelines can be very blurry, and you can read a more in-depth review by viewing this article written by Michael Kitces. One contrast of a CFP fiduciary compared to a DoL or SEC fiduciary is there are not any restrictions on commissions given to a CFP. Also, CFP fiduciary regulations are applied to any type of financial planning advice once the relationship advice initiates between advisor and client. So, whether your CFP is advising you on your investment accounts, retirement accounts, your tax planning, etc., they will be held to their fiduciary standard. But be mindful, a CFP fiduciary cannot be held legally liable in the event their advice proves to be not in the best interest of the consumer. Because the Board of Certified Financial Planners is not a regulator, the worst that can happen is the title of CFP would be removed from the advisors name; however, they are still able to work as financial advisors.
Voluntary Fiduciary
The Voluntary fiduciary is one who has decided on their own to take an oath to comply with the financial advisor fiduciary standards. The standards set to uphold are created by the financial company, and can vary from one organization to another. These standards are set in the hope to improve the advisor’s financial advice that is given to a consumer. Although these standards can be more stringent, it is notable that again, there is no legal consequence for those who do not comply with the standards set forth. At worst, the advisor who does not comply with the voluntary oath they have taken would be removed from the company they work for. The only exception would be for a company who requires their advisors to sign a fiduciary contract with their client after they have already voluntarily committed to act as a fiduciary. In these cases, legal action can be pursued.
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Important takeaways:
The regulations and expectations of each of these fiduciaries can vary greatly. It is prudent you ask questions, and understand exactly what is expected of your financial advisor prior to deciding who you are comfortable working with. Never be afraid to ask how your advisor is paid, what type of fiduciary they are, and if they are any conflicts of interests that may present themselves. Do your research and decide what is best suited for your personal needs. The financial advisors at The Irwin Agency can provide guidance in choosing which services are right for you, and tailor a plan that best suits your needs. Give us a call today to book your free consultation, (501) 623-7066.