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Understanding Fiduciaries: Your Rights & Financial Protection

You’ve likely heard the term fiduciary used in investment circles. Although that is one context in which a fiduciary is important, it is not the only time when you might need one.

A fiduciary is simply any person or organization that’s able to act on the behalf of another person. They’ll be able to help manage your finances and other assets. As a fiduciary, they have an obligation to you to act in your best interests at all times. They’ll have to be honest and act in a manner that best represents their clients.

Since assets are a wide range of items ranging from your home to your retirement funds, it’s important that you find a trustworthy individual to help you manage them. You can ensure that your assets are in the right hands by finding a fiduciary that is legally obligated to act in your best interests. When you choose to work with a fiduciary, you’re minimizing the potential of conflicts of interest and building trust from the beginning.

Today we’ll take a closer look at the role of a fiduciary and why it’s important to work with one.

What Is A Fiduciary?

A fiduciary is officially any person or group acting on the behalf of another person or group toward the ethical and legal management of their finances or other assets.

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The Fiduciary Duty

When you place your trust in a fiduciary, they’re obligated both ethically and legally to safeguard your best interests. When the fiduciary you choose knowingly enters into a situation in which they accept this duty, then they’re required to act in your best interests.

This stems from an 1830 court ruling that created the prudent person principle. The famous court case, Harvard College vs. Amory, led to the idea that someone managing the financial interests of another party should act in the best interests of the beneficiary, not in a way that would benefit them personally. With that ruling, the law now requires any fiduciary to act with care, intelligence and discretion when managing assets on a beneficiary’s behalf.

The standards of the prudent person principle that encompass the fiduciary duty include:

Solely using comprehensive and accurate information when giving investment advice.
Explicitly disclosing when a conflict of interest arises and avoiding them in general.
Emphasizing clarity and transparency toward any fees charged for fiduciary services.
Avoiding the usage of client assets to benefit the fiduciary in any way.

Beyond the need for appropriate management of assets, fiduciaries are limited in the way they can profit from their advice. In most cases, a fiduciary cannot accept profits from their decisions on your behalf. However, they can profit from their duties if the beneficiary agrees to the specific terms ahead of time.

Fiduciary Types

Now that you have a better understanding of fiduciary responsibility, let’s take a closer look at the different types of fiduciaries. Many different professionals can take on the responsibilities of the fiduciary rule.

In most cases, fiduciary obligation takes the form of a trustee and beneficiary relationship. With that, the trustee is responsible for appropriately managing all of the property within the trust for a beneficiary.

Although that is the most common fiduciary relationship, it is not the only type. A few other types to consider include:

Financial advisor. In this case, the fiduciary would be responsible for upholding your financial interests in a variety of ways. This may be the most common type of fiduciary, but it is not the only one.
Attorneys and clients. Attorneys have a strict fiduciary duty to their clients. An attorney is required to act in complete fairness and fidelity to their clients in all dealings. If a breach in fiduciary duty happens, then the attorney will be held accountable in the court of law.
Executors and personal representatives. With a one-time financial transaction, an executor or personal representative may have fiduciary duties to their clients. For example, you can use a fiduciary to assist with a real estate transaction. They would be required to act in your best interests with minimal involvement on your part.
Corporations and investors. A corporation has a financial duty to its investors. A stockholder in a company should expect the board of directors to uphold their fiduciary duties to the investors.
Legal guardians and wards. A legal guardian has a fiduciary responsibility to their wards to make decisions that prioritize their best interests. In this case, it extends beyond financial responsibility. As a legal guardian, you’re responsible for ensuring that the minor is taken care of mentally and physically while maintaining their daily welfare. This relationship would continue until the child legally becomes an adult.
Health care agents. If you’re unable to make medical decisions due to your health, a health care agent can act as a fiduciary for your situation. In this case, they can’t be an institution or healthcare provider that is treating you. It must be an individual who will uphold your written wishes in regard to your healthcare treatment options.

These are a few of the most common examples of a fiduciary relationship. The expectation is that the beneficiary’s best interests will be maintained in good faith without any fact-checking on their part.

As you choose your fiduciaries, it’s a good idea to talk to the party that you are considering. Make sure that they’re able and willing to take on this task. If they’re unable to shoulder this ethical burden, then consider a second choice.

Breaches Of Fiduciary Duty

If a fiduciary does not act in the best interests of their beneficiary, then it is considered a breach of their duty. There are a few things that need to be in place in order for a breach to occur.

First, the relationship between the fiduciary and the beneficiary must have been established at the time of the breach in question. Second, the breach must have occurred within the scope of that fiduciary relationship.

A breach could be any action that isn’t in the best interest of a client or any actions that benefit the fiduciary’s interests as opposed to the client’s. Another way for a fiduciary to breach the trust of the relationship is to fail to disclose conflicts of interest as they arise or other important information that is relevant to the relationship.

If a fiduciary fails to uphold their duties, it could lead to legal consequences. In most cases, the beneficiary would have the right to pursue the recovery of anything lost by the breach. However, it can be difficult to determine what is a breach and what isn’t because people make different choices based on the information available. When in doubt, consult a lawyer about your options if you think there has been a breach of fiduciary duty.

Suitability Standards And Fiduciary Standards

As you seek a professional to work with, you may run into some confusion between suitability standards and fiduciary standards. It’s completely normal to confuse the two because there is a substantial amount of overlap in terms of applicable knowledge and decision making between them. However, it’s important to understand the difference. With that, we break down the two below.

Fiduciary standards were put in place and regulated by the Securities and Exchange Commission (SEC). The standards bind the fiduciary to put the needs of the client above their own interests. Here are a few standards that fiduciaries must uphold:

The fiduciary puts the beneficiary’s interest ahead of their own.
The fiduciary avoids all conflicts of interest regarding the beneficiary’s account.
The fiduciary has explicit and thorough communication with the beneficiary that delineates all reasoning and evidence toward asset-management decisions.

An example of these standards would be that a fiduciary is unable to buy an investment for a client that would result in a higher commission for themselves or their investment firm.

On the other hand, suitability standards are different from fiduciary standards. The loose definition of these standards is that the advisor must make a recommendation that is in the best interest of their clients. All that is necessary is that the advisor believe that the decisions are helpful to the client and avoid excessive transaction fees.

The suitability standards that advisors generally uphold include:

The advisor makes suggestions that are suitable for the client.
The advisor divulges all material information.
The advisor prices their services related to current market trends.
The advisor completely discloses any conflicts of interest.

In most cases, the primary source of income for an advisor is commissions earned from the sale of certain investment products. With that, you can easily discern a potential conflict of interest. After all, why shouldn’t the advisor try to sell products that benefit their bottom line?

Find A Fiduciary Or Financial Advisor

If you’re seeking out a financial advisor, then you likely want to ensure that they are bound to a fiduciary duty.

Start by asking around your circle of family and friends for positive fiduciary recommendations. Many will be happy to offer you the contact information of a trusted individual. Alternatively, you can seek out testimonials online.

Once you’ve found a few people you’re interested in working with, you’ll need to determine whether or not they are fiduciaries. Of course, you can ask them outright. Make sure to get their answer in writing and understand the scope of their duty. Take the time to determine that they’re able to uphold their fiduciary duties 24/7.

If you aren’t comfortable asking, then you can use the SEC’s advisor search tool to determine their standing. You’ll be able to find out more information about their credentials for your own peace of mind. If you choose to move forward with a fiduciary relationship, then make sure that the expectations and scope of the relationship are clear. If you have questions, don’t be afraid to ask. You should be comfortable with the fiduciary you choose to work with.

If you prefer to avoid a personal financial advisor, consider working with a roboadvisor to set your investments on the right trajectory.

The Bottom Line

As you seek out professional help, it helps to know exactly what you’re looking for. In some cases, you may want an advisor with a fiduciary duty to uphold your best interests. In other cases, you might be more comfortable with a financial advisor who only upholds suitability standards. The decision is entirely dependent on your personal situation.

The most important part of this process is to ensure that you’re comfortable with your choice. After finding the right fiduciary, you can move forward with financial decisions knowing that your advisor is putting your interests first. That peace of mind can go a long way!