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Fiduciary Archives | R | W Investment Management

Top Ten Fiduciary Responsibilities

A plan fiduciary plays an important role in the organization’s financial health. Not only do they oversee the fiduciary process, but they identify and serve the best interests of a retirement plan’s participants and beneficiaries. Here are 10 important responsibilities to keep in mind.

1. Limit liability: As a fiduciary, it is imperative that you understand ERISA so you can keep yourself and your business safe from liability.
2. Find the right plan provider: Finding a retirement plan provider is much more complicated than many realize.
3. Keep costs low: No matter how big your business’s budget, always monitor fees to ensure you are getting the best deal.
4. Oversee plan performance: Once a retirement plan is in place, continuously monitor its performance.
5. Educate plan participants: Regardless of position and hierarchy, employees may come to you asking about plan options. What should you say?
6. Stay informed: Your role is to know more about your business’s retirement savings plan than everyone else, so education is vital.
7. Avoid personal gain: As a fiduciary, it’s important to distance yourself from any situation that could be perceived as personal gain from the retirement plan.
8. Diversify investments: The investment options offered in your plan should be diversified. This limits financial risk and helps balance risks and rewards.
9. Monitor participant satisfaction: Evaluate employee satisfaction with the plan. Follow up on complaints, and regularly gauge the plan needs to determine the right time for change.
10. Ensure employees understand their options and monitor their satisfaction levels.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

Is Your Financial Advisor a Legal Fiduciary (and Why is that Important?)

If you hire someone who goes by the title of “financial advisor”, you expect them to place your interests before theirs. After all, doesn’t the word advisor imply that they provide true advice?

Many investors are surprised to learn not everyone who uses the title “financial advisor” is legally bound to act in your best interest.  In 2018, the picture became muddier. In March, a Court of Appeals vacated the Department of Labor Fiduciary Rule. This Fiduciary Rule was proposed in order to require financial professionals who provide advice to retirement savers to act as a legal fiduciary.

What exactly does this mean? If you are a fiduciary, you are legally responsible to place the client’s interest before your own. It is much like the responsibility an attorney has to their client, or a parent has to his or her child. Negligence can and should come with legal consequences.  When it comes to professional advice about your money, implied consequence can be a very good thing. Unfortunately, the financial industry has made it confusing to know whether or not you are working with a fiduciary.

Understanding the Fiduciary Role

Other professions regularly act as fiduciaries. If you retain an attorney or see a medical doctor, for example, they are each required to do what is best for you…not what is best for them. That means the attorney must make recommendations based on your best interest, not what will generate more fees for his or her practice. The doctor may not prescribe any procedures or medications that are not in your best interest.

Not all financial professionals are held to that same fiduciary standard. It is perfectly legal, for example, for a non-fiduciary advisor to recommend a more expensive mutual fund to you, as long as it is deemed “suitable” or appropriate for an investor’s objectives and risk tolerance.  This suitability can be documented simply by requesting the client complete a questionnaire.

As an investor, it is of the upmost importance that you know whether you are working with a fiduciary advisor or a commissioned broker. Investors may end up paying more simply because the suitable product pays a higher commission to the advisor.

Who’s Who of Fiduciary Financial Professionals

While most professionals these days go by the generic term of “financial advisor” or “wealth advisor” …the actual licensing and registration can tell you if they are a fiduciary or not.  Anyone who is licensed as a Registered Representative is not a fiduciary. In fact, they cannot charge you a fee for advice. Rather, Registered Reps will charge you a commission for product recommendations and implementation. Does this sound like an advisor to you? Actually, it sounds more like a salesperson. While Registered Reps may be competent and educated, it is critical to know if you are receiving true advice or product recommendations that result in a commission.

If you walked into a Ford dealership and asked which car they recommend, you are more than likely to drive away in a brand-new Ford. The salesperson is incentivized to sell you a Ford even if a used car or a different brand would have met your needs at a lower cost.  Registered Representatives are held only to a “suitability” standard. That means they must simply recommend something that could be appropriate for you. Even if the one they recommend pays them a (higher) commission, as long as it is documented as “suitable”, there is no problem.  In fact, a Registered Representative’s first loyalty is to their employer and shareholders…not you, the client.

Fortunately, not all financial professionals operate this way.  Those who are licensed as Investment Advisor Representatives (the employees) or Registered Investment Advisors (the firms) are held to the fiduciary standard. They must always place client interests before their own. A conflict of interest may not be present in the relationship. If they do not place your interests first, you have legal recourse.  Instead of receiving commissions from products, fiduciaries are only paid a fee for advice.

 The High Cost of Conflicted Advice

If a Registered Representative has placed a product in your account for the sole reason of making a commission, then you have experienced  a conflict of interest.  A White House Task Force estimated that this “conflicted advice” costs Americans about $17 billion per year.  While you still may end up with a solution that generally works, your investment expense will be greater as a way cover these commissions. Over time, these small expenses can have a real effect on your total return.  Ideally, investors should avoid conflicted advice altogether.

Always Find Out

It is not always easy to discern who is a fiduciary and who is not.  Some advisors are “dually registered” as both a Registered Representative and an Investment Advisor Representative acting as a fiduciary only some of the time.  Most investors are not in the habit of questioning the advice they receive or asking if the recommendation represents a conflict of interest.

Get it in writing

It is vital that you are confident in the financial advice you receive:  are you  dealing with a legal fiduciary, or not?  We always recommend clients visit the following websites to research potential financial advisors.

However, one easy way to find out is to ask the prospective advisor this one question:

Will you act as my legal fiduciary at all times?

And ask for that in writing.  If that isn’t happily provided, you just learned something very important. It is safer to keep looking and limit your search to those who will act as your legal fiduciary.

Photo of Ryan C. Warwick of RW Investment

Ryan Warwick is Principal of R|W , a Registered Investment Adviser. R|W is a fee-based financial planning and investment management firm headquartered in Boise, Idaho serving families nationwide. Our advisors hold the Certified Financial Planner™ designation and the Chartered Financial Analyst® charter and serve as trusted stewards to help families preserve and grow their wealth for over three decades. Visit us at https://www.rathbonewarwick.com/.