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What is the Fiduciary Rule?

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What is the Fiduciary Rule and Why You Should Care

When you’re deciding on a financial advisor or a firm to guide you on financial planning and wealth management, you should have a lot of questions prepared. One of the most important questions to ask is whether the advisor is a fiduciary. (A Registered Investment Advisor, by law, is a fiduciary.) You might assume that a financial advisor always has the best interests of the client at heart. That, unfortunately, is not always true, and it is at the heart of the fiduciary standard.

What is a Fiduciary?

A fiduciary is obligated to put the client’s interests first. (Palmerston Group is a Registered Investment Advisor and a Fiduciary.)

When a person or organization acts as a fiduciary, they are ethically and legally bound to act in the best interests of the party whose assets they are managing. Such assets are managed to benefit their owner, not for the profit of the manager. There should also be no conflict of interest between the fiduciary and the owner of the managed assets. Fee-based investment advisors are regulated either by the state or the Securities and Exchange Commission (SEC). A fiduciary has the duty of “loyalty and care,” which is another way of stating that the client’s interests are always put above their own.

Representatives of broker-dealers, on the other hand, operate differently. They are sales representatives, and while they must make “suitable” recommendations to clients, their primary loyalty is to the brokerage for which they work, not necessarily the client. They often are also paid by commission and other sales incentives rather than the flat fee charged by fiduciaries. 

There are plenty of honest broker-dealers in the business, but the ability to charge extra fees is a reality. The Council of Economic Advisors estimated $17 billion annually is lost by investors overpaying for fee-larded investment products.

Getting Conflict-Free Advice 

Conflict-free advice, in our opinion, should also mean no limitations on the client’s right to get the best advice from whomever they want. Your desire for independent advice sometimes conflicts with a big broker-dealer’s goal of locking in its top advisors and their books of business (their clients). 

Getting independent advice should include the ability of a client to follow the advisor to a new firm should the advisor decide to move. Clients invest significant time in growing relationships with key advisors, and that should be respected.

Yet, many major brokerage firms have made it difficult for advisors who decide to leave the firm to become independent to continue to serve those clients – even if a client wants to continue the relationship with the advisor who moved firms. In recent years, big broker-dealer firms, including Morgan Stanley and UBS, have sued advisors who went independent (often switching to become Registered Investment Advisors and fiduciaries at the same moment). The brokers sued to prevent those advisors from serving clients who wanted to continue with the advisor.

So as you evaluate the right advisory firm for you, consider the importance of a fiduciary standard, but also the other ways in which a conflict-free advisory relationship can be established and safeguarded.

Interested in a free assessment? Please click here.