WHAT ARE THE DUTIES OF A FIDUCIARY?

A person sitting on a couch Description automatically generated with low confidence

What Are Fiduciaries?

In the financial world, fiduciaries are people that have been held in high regard, and these individuals are also placed in a position of trust. A fiduciary is “legally” obligated to partake in actions that benefit the individual and provide the highest standard of care. These individuals serve several roles and can even be guarding your interests after your death.

Their is generally a lot of confusion and much distrust around the role of a fiduciary. This article will be going in-depth and analyzing and breaking down the role of a fiduciary.

Fundamental Role Of A Fiduciary

Fiduciaries are required to set aside their own goals and agendas for your well-being. In normal circumstances, these individuals are often appointed by the state after your death to ensure that your real estate settlement is carried out according to your last will. According to state law, if you pass away without a will, the fiduciary is entrusted with the distribution of assets to your heirs.

Fiduciaries are also your lawyers that act in your best interests regarding any legal matters that you face. They also take the form of a financial advisor working for the benefit of trustees and beneficiaries.

The duty of a fiduciary is essentially a duty of loyalty and also a duty of care. A fiduciary is required to act in the best interests of its client or the client’s beneficiary. The role of a fiduciary is significant and requires a lot of responsibility and commitment. Employers of fiduciaries have to expect that the employees are acting in the best interests of a client.

RELATED:Top 4 Benefits Of Hiring A Financial Advisor

Types Of Financial Fiduciary Advisors

Fiduciaries come in all shapes and sizes and also types, but the role of all of them is drastically similar. Retirement plan fiduciaries manage the plan and also the assets. All fiduciaries have to follow five standard codes of conduct.

  1. Act for the benefit of participants and beneficiaries
  2. Use assets only to pay benefits
  3. Act prudently
  4. Work on diversifying clients investments
  5. Work by the document provided
A person typing on a computer

Description automatically generated with low confidence

In the financial world, since all my articles are geared towards finance, there are multiple different types of fiduciary financial advisors, and these include

  • Fee-only fiduciaries
  • Certified Financial planner Fiduciaries
  • Registered investment advisor fiduciaries
  • Voluntary Fiduciaries
  • Retirement advisor Fiduciaries

Below I’m going to break down every different kind of fiduciary.

Fee-Only Fiduciaries

The general understanding behind a fee-only fiduciary is that these kinds of fiduciaries receive a flat payment/compensation directly from the client in place of their services. These fiduciaries don’t receive any sales-related wage or salary from their employers.

The mode of charging fees is entirely up to them. They can be a flat rate, hourly rate, or they can also be a fee charged under a percentage of their assets. The method of payment is up to the fiduciary and client’s discretion.

A computer and a mouse on a table

Description automatically generated with low confidence

However, in the case of fiduciary receiving commissions, they must always disclose and manage their conflicts of interests in a manner that allows them to fulfill their fiduciary obligations to a client.

Certified Financial Planner fiduciaries

Another type of fiduciary is the certified financial planner fiduciary. These CFPs are held to a fiduciary standard where they are actively involved in providing financial planning or are actively engaged in financial planning elements. Not every certified Financial planner is supposed to be assumed at a fiduciary position. Certified financial planners are only acting in fiduciary interests in the situation where they are explicitly engaging in financial planning activities for a client. In that role, they are supposed to always work in light of the client’s best interests.

All advice related to taxes, investment planning or retirement planning must always be given in the client’s best interests.

Registered investment advisor fiduciaries

While certified financial planners are occasionally in the role of fiduciary, registered investment advisors always assume the role in their operations. For a registered investment advisor, there is a requirement for them to be clear and transparent with the clients regarding their actions and investment decisions. They are also required to take charge and also disclose any potential conflicts of interest.

Advisors are required to disclose any conflicts of interest in an ADV form if they exist. There are no restrictions on a person assuming an advisory role, even if he has substantial conflicts of interest. Individuals are advised to practice their due diligence before appointing a fiduciary.

Retirement Advisor Fiduciaries

Like the registered investment advisor fiduciary, the retirement advisor fiduciaries are required to provide retirement advice to investment advisors. This also includes 401k plan participants and individual retirement account owners. The fiduciary role also applies to any advisor giving retirement advice as long as the advice is given tied to a retirement account.

A picture containing person

Description automatically generated

Under the DOL fiduciary role, advisors are required to adhere strictly to the fiduciary standard, which means that advisors are required to provide their clients with the best advice by following their interests.

Voluntary fiduciaries

These particular kinds of fiduciaries are the fiduciaries that are not necessarily registered with either the SEC or the DOL, but nevertheless, they have pledged to comply with the fiduciary standards. Certain professions require individuals to undertake a fiduciary oath voluntarily, but it is not a requirement set in stone for most professions.

Most advisors may pledge to be fiduciaries with fee-only organizations like the national association of personal financial advisors that require members to undertake a fiduciary oath.

The Suitability Rule

Broker-dealers who are often compensated by commission generally only have a sustainability organization. The financial regulatory authority regulates Broker-dealers under standards that require them to make suitable recommendations to their clients.

The sustainability rule is one such rule that asks the broker/dealer to assume that any recommendations being made are for the client’s best interests. The primary duty of a broker is towards their employer and not to their clients.

A picture containing indoor, tool

Description automatically generated

Another component of this rule is to ensure that the transaction costs are never high and that the recommendations are not unsuitable for the client. Things like excess trading for broker commissions and frequently changing account assets to generate transaction income for the broker-dealer. For the broker, there is also no explicit need to disclose any conflicts of interest either. The advisor is responsible for making the best investment decision in light of all the information that is made available to them.

How Can You Secure Yourself

Quite naturally, a fiduciary has a lot of authority over your monetary affairs, and this can make one uneasy. Suppose you’re a business or own a business. In that case, you might want to consider getting insurance to secure yourself from any conflicts of interest that the fiduciary might be engaged in.

Fiduciary liability insurance is meant to fill the existing gaps in traditional coverage by offering employee benefits liability and offering both director’s and officers’ policies. Insurance can help provide you with financial protection whenever there is a need for litigation.

You will, however, need to give proof that a breach of fiduciary duty has occurred. The type of breach varies in each case, and so does the intensity, but it is safe to assume that if you face a fine for late payment/ non-payment due to the fiduciary’s laziness, you can file for a breach of fiduciary duty.

Another similar instance for this would be if there were any direct actions taken by the fiduciary which caused you a significant financial loss. Or if the fiduciary carried out financial decisions keeping his interests at heart and causing you a loss. These instances would also go under a breach of fiduciary duty.

A large building with a fountain in front of it

Description automatically generated with medium confidence

Usually, a fiduciary position (especially in money matters) is only given to people that the person trusts. A general understanding of the fiduciary commitments is generally not enough for someone to trust the person and hand over the control of all their investments to. The potential fiduciary is also required to have more knowledge and experience than the person giving them the role.

Fiduciaries are motivated to act in the client’s best interests because a claim for a breach of duty can cause massive damage to a fiduciary’s reputation. In most cases, fiduciaries are not profiting directly from the role unless otherwise stated in their agreement with the client.

If an individual is found to be in breach of his role, then he can also get his certificates revoked by the courts. To become certified, a fiduciary must pass an examination that works on testing the knowledge of their laws, practices, and the knowledge of their security-related questions and procedures. Therefore, if you’re thinking of hiring a fiduciary, it might be best to check their certifications first.

Leave a comment

Your email address will not be published. Required fields are marked *