Question: I am looking for a financial planner. In my research I read an article in last Sunday’s New York Times stating that some financial planners are “fiduciaries” who put their client’s best interests ahead of their own. What is a fiduciary?
Answer: In a survey conducted on behalf of the Securities and Exchange Commission, a majority of participants didn’t know what the word “fiduciary” means. In simple terms, if you manage property for the benefit of someone else and exercise discretionary authority or control over the property, you are a fiduciary. Common examples of fiduciaries include: Non-profit Foundation Board Members; Business owners and corporate officers and corporate board members; Registered Investment Advisors; and Trustees.
Non-profit Foundation Board members have a fiduciary responsibility when handling finances and investments. The Uniform Prudent Management of Institutional Funds Act, which is part of California’s Probate Code, directs those responsible for managing and investing an institution’s funds to act “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Board members who carelessly or negligently invest funds may be personally liable for any losses.
Business owners, corporate officers, and members of the board of directors in companies that sponsor retirement plans have fiduciary responsibilities relating to that plan. They are fiduciaries if they exercise discretionary control or authority over plan management and asset disposition, and if they participate in the selection of the investment committee, plan officers or directors, and plan administrators.
Registered Investment Advisors are fiduciaries and are required to adhere to a fiduciary standard of care - the “client-comes-first” standard - that requires the advisor to place the best interests of their clients ahead of their own. Investment advisors typically offer year-round investment management and advisory services for a fee, usually charging a percentage of assets under management, typically around 1%. Under current rules, non-RIA financial advisors are paid by sales commissions and are held to a lesser “suitability” standard, meaning that the investment they recommend and sell to their clients is not necessarily the best or least expensive option. This will change in April for advisors to retirement accounts. Under a new “fiduciary rule” imposed by the Department of Labor, any financial advisor, including non-RIA financial advisors, must act as a fiduciary to retirement plans and accounts. That would mean, for example, that brokers can no longer sell mutual funds or annuities that pay generous commissions when less expensive but equally appropriate alternatives are available for retirement plans and accounts. Registered Investment Advisors are always under the fiduciary standard and required to recommend the less expensive option in both retirement and non-retirement accounts.
In summary, if you are the trustee for someone’s money or property you are a fiduciary. You must manage trust assets for the benefit of the beneficiaries and follow prudent investment practices. Whether or not you are investing prudently is determined by the process you follow, not merely by which investments you select. Trustees should seek guidance from the Uniform Prudent Investment Act, another part of California’s Probate Code. The UPIA lists specific duties of a trustee, including “to diversify” and to “evaluate investments in the context of the portfolio as a whole.”
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to firstname.lastname@example.org.