By Michael Williford, fall 2016 student intern
Some of you may have seen John Oliver’s recent segment on the importance of getting your financial advice from a professional that owes his or her clients a fiduciary duty. If not, and you can stomach some “blue” language, you can watch the full report here, or read about it here and here. As a reminder, this very blog has touched on the issue in the past. That post is worth another read.
In a nutshell, after explaining what a fiduciary is, Oliver advises viewers to make sure that any investment advice they pay for comes from someone with a fiduciary obligation. More traditional organizations like the Financial Industry Regulatory Authority (FINRA) and the Consumer Financial Protection Bureau, have attempted to explain what a fiduciary is and why it might be important to the average investor attempting to save for retirement. So, what’s the buzz about? Who owes a fiduciary duty and what is it?
A fiduciary duty is the obligation an individual has to manage another person’s money or property in a way that best looks out for the interests of the person whose money or property the individual is managing. People who owe you such a duty are sometimes called “fiduciaries.” Don’t be fooled by the different terms, it’s really very simple. The most common example of a fiduciary is someone who has power of attorney for someone else. For example, service members frequently execute powers of attorney so friends or family can take care of issues while the service member is deployed—issues that would normally require the service member’s signature or consent. Technically, the friend or family member in those circumstances is obligated to act in a way that protects the bests interests of the service member. To do otherwise would be a breach of the fiduciary duty that person owes the service member. Like a deployed service member, if someone providing you financial advice is your fiduciary, then that person is required by law to recommend investment products that best serve your interests, taking into account your age, assets, investment goals, risk tolerance, and any other factors that might reasonably influence the financial products that are best suited for you.
It sounds perfectly reasonable, doesn’t it? The problem is that not everyone trying to sell you a financial product is your fiduciary. The average broker-dealer, for example, may not be automatically obligated to put your interests above his or her own. Think The Wolf of Wall Street here, folks. The result is often that some brokers may recommend financial products to you that don’t match your risk profile to make money for themselves.
So, what’s the average investor to do? How can you ensure the advice you’re receiving is based on your needs and not a broker’s need to make his next boat payment? Ask questions. Ask anyone who’s trying to sell you a financial product what legal duty they owe you. Although in some states, a broker-dealer is a fiduciary, in others, a broker-dealer has a duty to recommend products that are “suitable” for you. As we’ll learn in future posts on this subject, that’s a much different standard than the fiduciary duty a registered investment adviser owes his customers.
Stay tuned for future posts explaining the difference between investment advisers, broker-dealers, and the shell games financial professionals frequently try to play when they don’t legally have to put your interests ahead of their own——other words, the games they play when they don’t owe you a fiduciary duty.