The "F" Word: Understanding The Fiduciary Standard

July 20, 2015

You may have heard the word tossed around recently on the news, but what does it mean when someone refers to a fiduciary standard.  Put simply, a fiduciary is someone who puts your very best interests first.  This means that if your advisor falls under a fiduciary standard they are legally bound to do the very best thing for you.

 

The fiduciary standard is nothing new.  In fact, Cedarstone already adheres to the fiduciary standard because we are an RIA (a Registered Investment Advisor) and under current law, RIAs are required to follow the fiduciary standard.  However, up until this point, other types of investment advisors, most notably brokers have fallen under the suitability standard meaning they are only legally bound to provide something that is suitable for you.  At this point, you’re probably asking “what is the difference between fiduciary and suitability?”  Consider the following example: let’s say that you go to a dietitian and ask for some advice on what to eat.  If the dietitian is under the suitability standard, he just has to suggest something that is edible.  As long as it is edible it’s suitable for you to eat.  He could offer you steak, cupcakes, or a stick of butter.  Conversely, if the dietitian is under the fiduciary standard, he has to offer the very best thing for you to eat – probably vegetables.  Advisors like this model because it allows them to favor options that pay them higher commissions even if they’re not the best investment options for you, the end client.  As long as the investments are suitable for your portfolio’s mandate, the advisor can choose them.

 

Now back to the news.  Earlier this year the Department of Labor proposed regulation that would broaden the number of individuals who are legally required to follow the fiduciary standard.  More specifically, this regulation applies to individuals providing advice on retirement funds like your 401k or pension.  This is good news for you because it means that more and more advisors will now be bound to act in your very best interest and do the right thing for your future.  Just like your body will thank you for heading the fiduciary dietitian’s advice, your portfolio will thank you too.

 

If you’d like to learn more about the standards your advisor is held to, feel free to give us a call.  We’re happy to expand on the different standards.

 

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