Fiduciary responsibility, sometimes referenced as fiduciary duty, is the best term in finance, with the possible exception of fungible. So, what is fiduciary responsibility, and do you need someone with a fiduciary duty to help with your finances?
Fiduciary is a fancy word for the concept of doing what is in the best interest of someone, typically a client or a trustee. Most people are shocked to find out that most financial planners, financial advisors, stock brokers, and the like do not have a fiduciary duty to their clients. In other words, the guy you have managing all of your money is not required, by law, regulation, or contract to act in your best interests. Rather, they typically have a much more easier standard called suitability.
Suitability means that the investments or other recommendations they make are merely suitable for someone like you, not the best for you. So, if it isn’t wildly inappropriate for you to be investing in Apple stock, then they can recommend Apple stock, even if they feel like another investment would be better. Any attempt to ever make any of these financial professionals required to be fiduciaries is met with immediate and ravenous attack from Wall Street firms and banks. There are some financial planners who follow a fiduciary standard. They will often brag loudly about it, because if you know what it is, then you probably want it. Fortunately, for most financial companies, most people have no idea what it is, and worse, assume that the people working with them are already following that standard.
Do You Need Someone With Fiduciary Duty?
All of this sounds pretty straightforward on paper, but in the real world, it really isn’t that easy. For example, if I think Mutual Fund A is the best possible mutual fund for you, then I have met my fiduciary responsibility by recommending it to you. That is no guarantee that Mutual Fund A actually is the best investment for you, or even that it is a good investment at all.
While I was a financial advisor, at both a local bank, and for a major Wall Street brokerage, I never had a fiduciary duty to any of my clients. Technically, that all changed the day I became a Certified Financial Planner, because the rules of being a CFP state that you must act with fiduciary duty toward your clients. The reality is that nothing ever changed. As will all professions, there are good guys trying to do the right thing, and scumbags looking to line their own pockets at your expense. To both of these kinds of people, the words on a piece of paper don’t matter. I never cheated, or recommended bad things to any of my clients because I liked them. They had all signed up with me, and put their trust in me. Some of them were irritating, or took too much effort, but none of them deserved to be cheated. And, I never cheated anyone, or put someone in an investment with a bigger commission because it had a bigger commission. I sold the same investments to my own parents that I sold to everyone else.
So, why then do people make such a big deal out of fiduciary duty?
There are two reasons. The finance companies are so against it because it opens additional avenues for lawsuits against them. Even with hindsight, it is tough to show that an investment wasn’t suitable. But, with the benefit of hindsight, that adjustable mortgage might seem like a bad idea, same for that one tech stock, and don’t get me started on the micro-cap mutual fund. Even if the advisor thought those were the best investments (especially in conjunction with a whole portfolio), it can seem (especially without context) that maybe unlucky investments were “bad” investments that were not in the interest of the client.
The reason advisors who do follow a fiduciary duty makes such a big deal out of it, is that official sounding financial terms make it sound like they are more trustworthy. While it is nice that someone will comment, in writing, that they will always do what they believe is in your best interest, that doesn’t make them any better at knowing what actually is in your best interest. And, unfortunately, for a bad actor, no fancy words or contracts will stand in their way. In fact, it might just make you take longer to wise up.
The bottom line is that while you should trust your financial advisor and listen carefully to their recommendations, you must always understand what is happening, verify the information you are given, and then monitor the situation. Check your statements, watch your fees, and follow your performance at all times. Knowledge is always more powerful than any promise or contract provision.