What is a Fiduciary?

I had a prospective client inquire the other day about my fiduciary duty. What is my fiduciary duty in my profession and why would a prospective client care?

A fiduciary duty can be defined as the highest standard of care at either equity or law. A fiduciary is expected to be extremely loyal to the person who he owes the duty (the principal) and must not put his own interests ahead of the principal. Personally, I expect this type of care any time I am entering into an agreement with someone to oversee something of value for me. I have also aligned myself with professional organizations and standards boards that require this level of professional conduct. Unfortunately, it can be difficult to find professionals who will agree to this level of care. We are all inherently selfish beings and tend to look out for ourselves first.

Regulations in the financial world allow for various types of arrangements between professionals and clients. Not all of these arrangements require the financial professional to act as a fiduciary. Because of the sensitive nature and the significance of financial matters in all of our lives, I encourage anyone I come in contact with to consider the types of arrangements they enter into with various professionals to ensure that their needs are being considered first instead of someone else's needs. Feel free to contact me if you are ever in question about a financial relationship and how it should be structured, considering all involved. I have also included a list of valuable websites on this blog that provide resources for finding ethical financial professionals.

The Financial Planning Profession

When choosing a service provider, one often looks for someone with a professional license or credential. While a professional certification is not a guarantee that the service professional will be completely reliable, it does go a long way in guaranteeing that you are working with someone who has met professional educational standards and is subject to an ongoing level of learning.

Although the Certified Public Accountant (CPA) is widely recognized in the fields of financial accounting and tax preparation, a bit of public confusion exists when it comes to the best professional for personal financial advice. Although many titles and designations exist in regards to financial advice, the most recognized and reliable credential is the Certified Financial Planner (CFP) professional. In this unsettling period of economic volatility, it's critical to have a professional that will help you make and keep a financial plan that's best for you and only you.

The Certified Financial Planner Board of Standards was founded 25 years ago this week to foster the highest standards of excellence for financial planners. In order to become a CFP practitioner, one must complete advanced college level studies on nearly 100 topics, compile at least three years of work experience, pass a 10-hour, two day exam and most importantly, agree to uphold the fiduciary standard--which means putting the client's interest first above all others. Does your financial advisor meet these standards?

Do You Need a Fiduciary?

In order to answer this question, one must first know what a fiduciary is. A simple definition is someone who puts your interests first, or someone who is working for you. Considering the importance of financial affairs in our lives, I would assume that almost anyone would want to know that his or her financial advisor was held to a fiduciary standard.

Although the perception amongst the American public is that financial advisors are working with their clients' interest in mind, this is often not the case. Brokers are not held to the fiduciary standard. Instead, they are supposed to follow a suitability standard. This standard only requires that a client is presented a suitable investment product, versus considering the clients' needs first, as a fiduciary would. As a result, investors are often paying too much for a "suitable" investment, when a lower cost alternative might be available.

The recent financial turmoil has brought this inequity to light for many more Americans. Earlier today, the House Financial Services Committee held a hearing titled, “Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals.” The Financial Planning Coalition, made up of like-minded financial advisors who put their clients' interests first, testified in favor of a proposal that would require all financial intermediaries who offer broad-based financial advice to be subjected to the high standards of a fiduciary. Although regulation should be carefully implemented in order to prevent too much government intervention in our economy, this new standard would be a benefit to many Americans and their financial well-being. I encourage you to contact your U.S. government representative to express your feeling if you agree.