What is a Fiduciary and why should you care?

There has been a debate in Congress on whether or not to mandate a “fiduciary” standard on the financial services representatives that hold themselves out to be a financial advisor or financial planner. Regardless of whether or not this passes, consumers should be aware of the distinction and ask their financial advisor in whose interest they serve.

A fiduciary advisor exercises his/her best efforts to act in good faith and in the best interests of the client. Fiduciary advisors are impartial regarding product. Non-fiduciary advisors are “agents of the firm” and have a responsibility to generate revenue for the company they work for. The standard of care is “suitability” rather than “best interest.” If a product is suitable (meaning they can justify you buying it), but is not in your best interest, you may never know.

The fiduciary advisor will tell the client in writing about any conflicts of interest which will or reasonably may compromise the impartiality or independence of the advisor. Agents of the firm have no such responsibility. Selling a product for a commission almost always creates at least a potential conflict of interest.

A fiduciary advisor does not receive any compensation that is contingent on any client’s purchase or sale of a financial product. A fiduciary advisor provides a service rather then sells a product. A non-fiduciary advisor often times sells products and receives commissions so it is difficult to know if the client really needs the products being sold. The insurance industry has fiercely fought against the fiduciary standard because of this issue.

Of course, not all agents are bad and not all fiduciaries are trustworthy. However, consumers should know who they are talking to and where their advisor stands on these important issues. Ask your advisor if they support the fiduciary standard of care.

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