Fiduciary Duty // What Does That Even Mean?

My inbox has been flooded with news and commentary about the Department of Labor's new fiduciary duty rule, which was finalized last Thursday. You may be asking...what does fiduciary duty even mean? And why is everyone making a big deal about this DOL ruling? 

As a registered investment adviser, I have an obligation to act with fiduciary duty. The full definition from the Securities and Exchange Commission (SEC) is available here, but the English translation basically means "the client's needs must come before the adviser's needs." 

Seems like that would be common sense (and etiquette), right? Unfortunately, that's not always the case.

What would be a situation where the adviser's needs were placed before the client's needs? How about...a scenario where a broker pushes a particular fund to an investor because of the commission the broker will receive from it? (I've been in the profession long enough to have heard the saying that certain funds are sold, whereas other funds are bought.)

The new DOL ruling states that brokers getting paid to provide investment guidance on a retirement account must act solely in the best interest of the investor (aka fiduciary duty). Previously, the standard for recommendations was "suitable," which isn't as stringent as "acting with fiduciary duty." What's interesting is that the standards only apply towards retirement accounts, not all investment accounts. Either way, it's a long overdue step in the right direction! 

This Wall Street Journal article best sums up (1) how important the ruling is, but more importantly, (2) how investors assume that their interests are being put first:

"At their heart is a fact that still surprises many investors: Most brokers are under no obligation to do what is best for clients. Repeated surveys have found that investors believe—incorrectly—that anyone offering investment advice must put a client’s interests first. Instead, as long as they sell products that can pass muster as suitable, they are generally free to push offerings that earn them the highest fees, even if cheaper alternatives would be better for the investor."

If you have an existing financial advisor or are interested in hiring one, one of the most important questions to ask is if they will act with fiduciary duty. A follow-up question would be if they are fee-only or fee-based (there's a huge difference).  

Now you know fiduciary duty.