De-mystifying the Fiduciary

Dean R. Johns, CPA, John D. Dovich & Associates; Matthew A. Swendiman, Managing Director, Graydon Compliance Solutions, LLC


An odd sounding word to describe something to do with money.

In fact, as the definition of the word illustrates, “fiduciary” is at its core, a word with the concept of trust, confidence, obligation, law and benefit attached to it.  There’s been a lot of discussion about a concept involving the word “fiduciary” in recent months, and more correctly, the “fiduciary standard.” Many pundits have compared the fiduciary standard to a “suitability standard,” which has caused confusion in the minds of many, as well as causing some to ask the question of, “Why do I care about any of this?”

Stepping back for a moment, and remembering the description of the word, “fiduciary,” the fiduciary standard refers to a section of a law titled, “The Investment Advisors Act of 1940.”  This standard requires all financial advisors to act only in the best interests of their clients when suggesting financial advice.  It’s an important standard and one that all registered investment advisors must adhere to, or face severe punishment by the Securities and Exchange Commission (SEC), the governing body regulating investment advisors.   But again, this begs the question of, “Why do I care?”

We recently took a closer look at the fiduciary standard issue that’s been featured so prominently in the news of late and why you should care about this issue.

In basic terms, the fiduciary standard that has applied to the registered investment adviser community for years is different from the “suitability” standard that has previously applied to broker-dealers. Suitable investments selected by brokers do not need to have the client’s best interest in mind. As long as the investment was acceptable, or suitable, the broker met his or her regulatory burden. Alternatively, registered investment advisers who adhere to the fiduciary standard must put their clients’ needs first, and have a duty of care and loyalty to their clients. Fiduciaries are required to disclose and mitigate any conflicts of interest they may have. For example, a broker may be able to invest a client’s money in a stock that is also underwritten by their firm. In this example, the broker-dealer receives compensation from both the stock issuer and the client. With this type of conflict, it is difficult for investors to know if they are receiving the best advice.

There’s some confusion around the idea of the fiduciary standard increasing both transparency and costs.  Because brokers may make suitable investments for their clients, they may not fully search for higher performing, lower risk options. The duty of loyalty inherent with the fiduciary standard requires registered investment advisers to reduce conflicts, as well as costs. For example, when considering rulemaking to address the differences between the fiduciary and suitability standards, The White House Council of Economic Advisers found that conflicts of interest lead, on average, to $17 billion in losses, every year, for American investors.

Fortunately, the federal government addressed the differences between the fiduciary standard and the suitability standard.  In fact, many readers probably remember in April 2016 the Department of Labor (DOL) adopted rules intended to help retirement savers obtain investment advice in their best interest. Collectively the rules have been known as the “Fiduciary Rule.” The DOL and the Obama Administration believed the Fiduciary Rule would help investors better prepare for retirement.

Something to keep in mind is that, as proposed, the rules would affect 401k, IRA and other retirement plans, such as pensions. Taxable brokerage accounts would not be affected.

It’s also important to remember that anyone who invests with a registered investment adviser, either for retirement or taxable money, is served by a fiduciary. One weakness of the proposed rules is that brokers could still manage taxable assets under the suitability standard.

In February 2017, President Trump directed the DOL to produce an updated economic and legal analysis about the likely impact of the Fiduciary Rule. As part of this review, the DOL has delayed the applicability of some of the Fiduciary Rule until 2018.  Further, industry groups have expressed their hope that the Trump Administration will use this time to pursue one rule that would be consistent across the retail and retirement marketplaces, coordinating with the SEC.

While this might seem a bit confusing, the most important thing to remember is that investors should want to have a fiduciary standard so the advice they are receiving is in their best interests, and not solely the best interest of their broker or advisor. Hopefully, we will see a single fiduciary standard in the not-too-distant future that matches the need to protect investors without overburdening small private or family businesses like our own.