A fiduciary is an individual or organization that has an ethical or legal trust relationship with another person or group, putting the client’s interest ahead of their own. An ethical and legal obligation exists in which the fiduciary must act with trust and good faith to secure the client’s best interests. There are many ways to have a fiduciary relationship with another, such as legal guardianship, attorney/client, or power of attorney. However, this term is often used to describe a fiduciary operating in a financial capacity, such as money managers, accountants, bankers, executors, insurance agents, board members, and financial advisors.
How Does Fiduciary Duty Differ From Suitability Standard?
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A more lax set of rules, called the suitability standard, often governs broker-dealers and other financial advisors. Whereas fiduciary duty legally and ethically requires that the fiduciary act in the client’s best interests, suitability standard only requires a reasonable belief that it’s suitable. The term reasonable belief is where non-fiduciary advisors and brokers are given some wiggle room on what they can do. Under this standard, a broker could recommend investments or give advice that increases their bottom line while being beneficial to you; it isn’t necessarily the most beneficial. On the contrary, fiduciaries must act in your absolute best interest with no regard to their benefit.
What Are the Investment Fiduciary Guidelines?
There can be ramifications in any fiduciary relationship if that trust and obligation are ever breached. These vary from state to state, but litigation and legal actions are real consequences. For example, an entity operating as a financial fiduciary can be held legally liable, as well as civilly and financially, if they fail to act in their client’s best interest. Along with the legal governance, there are also generally accepted investment practices that fiduciaries should follow.
A fiduciary must educate themselves on all applicable laws or rules that may pertain to the particular fiduciary relationship. Once that has been established, the fiduciary must then establish clearly and concretely what every party involved is responsible for and put these agreements in writing where applicable.
Next, a fiduciary should define a clear set of objectives and goals to be accomplished. This would include acceptable risk levels, expected rates of return, and investment horizon. With this precise set of ideals, a framework is developed to evaluate the various options. Within this framework, a fiduciary can choose classes of assets appropriate to the end goals and objectives to generate a diversified portfolio while staying within the established framework. This allows the fiduciary to develop an investment policy declaration that provides the necessary details to execute the delineated strategy.
The implementation stage is where the actual financial instruments are selected and evaluated against the previously established framework. Due diligence must be done to ensure all potential investments are thoroughly evaluated and have criteria established to differentiate among the various investment choices. Depending on the fiduciary’s expertise, an investment advisor may be brought in to help with this part of the process. The fiduciary must make sure the investment advisor adheres to the fiduciary responsibility to the client.
Finally, the fiduciary should use the same due diligence and effort as the previous steps in monitoring the instruments implemented. Monitoring can include reviewing reports on the various financial instruments’ performance compared to similar financial tools to ensure the goals and objectives are met. Performance statistics alone are not sufficient as determining a better performing instrument is also part of the monitoring process.
Any organizational change in the corporate structure of any of these instruments or similar occurrences must be evaluated and a determination made on the potential future effect imposed on the particular investment. In addition to monitoring performance and events that could impact future performance, expenses inherent to the financial instrument must also be considered. How the funds are spent is another crucial detail that can affect the overall return on any investment, and fees must be reasonable to the investment.
What Is Fiduciary Regulation?
The Office of the Comptroller of the Currency, which is part of the Department of the Treasury, is the entity responsible for regulating all fiduciary activity in the United States. An unfortunate reality of fiduciary duties is that, at times, interests can be in direct opposition to one another. In this situation, the best-case scenario is to balance between these oppositional interests. However, this balance is not inherently synonymous with the client’s best interest, so it needs to be evaluated on a case-by-case basis.
Certification of fiduciaries is conducted at the state level, and can be revoked by a court of law if the fiduciary entity has neglected its duty to act in the best interest of its client. A fiduciary certification requires passing an examination to determine their expertise in the requisite laws, procedures, and practices about fiduciary responsibility.
How Do I Know If My Advisor Is a Fiduciary?
The impetus for determining the fiduciary status of an individual advisor ultimately falls upon the client. Throughout the various types of financial advisors and the many different certifications and titles attached to a particular advisor, it can be challenging to determine whether a specific advisor is a fiduciary or subject to the less stringent suitability standard throughout the various types of financial advisors and the many different certifications and titles attached to a particular advisor.
Fortunately, one way to determine if your financial advisor is a fiduciary is to check to see if they are a certified financial planner (CFP), which requires these fiduciary duties. This can be determined by looking them up on the CFP board’s website. Also, some due diligence of your own can be done here to research what their various titles and certifications mean to ensure that the chosen entity falls within the fiduciary category.
3D Partners Wealth Advisors
By definition, 3D Partners Wealth Advisors are a fee-only fiduciary entity. That means that they charge a fee for their service, which is not impacted by the performance of the various financial instruments. In other words, there are no commissions, only the fee paid to look out for your interests. That way, there’s no incentive beyond the client’s best interest for determining the investments undertaken.
This fee-only method is genuinely the most objective and transparent because all other incentivization has been removed. 3D Partners Wealth Advisors not only have the legal and moral obligation to perform in your best interest, but there’s no additional interest that could conflict, making this type of fiduciary the best type to seek to manage your financial future.