In 2015, the White House Council of Economic Advisors estimated that biased advice costs investors $17 billion annually. Thanks to the magic of compounding, over decades even very small differences in costs can make a dramatic difference in the size of an investor’s nest egg when retirement time comes. In fact, consumers continue to be sold overpriced mutual funds and annuities that come at a real cost to their retirement security. If a financial advisor receives a commission for selling certain products, that advisor may steer clients toward those products with higher commissions – again while suitable, not necessarily in the client’s best interests. When the new ruling was first announced, many consumers were surprised to learn that all financial advisors didn’t already have a fiduciary duty, but in fact the existing industry standard was frequently merely one of “suitability.” Under the suitability standard advisors are required to recommend products and services that are suitable to meet investors’ needs and objectives, but those choices may or may not necessarily be the best or most cost-effective ones. Duties owed to another party are not always financial in nature – lawyers, for example, have fiduciary duties toward their clients – but in the context of investment, fiduciaries are expected to manage their clients’ assets for the investors’ benefit, not their own. Two such duties are to act in good faith and trust (the term fiduciary comes from “fiducia,” the Latin word for “trust”).
When a person accepts a fiduciary duty on behalf of another party, it creates an ethical relationship of trust with specific duties. Prior to this, most advisors acted under a “suitability standard” which gave advisors more wiggle room. Last year, the Department of Labor (DOL) issued a new ruling requiring that most financial professionals who provide advice on retirement investments must act as fiduciaries, meaning they are legally and ethically required to act in the best interest of their clients. Deposit Account Disclosures: Personal Productsįinancial Advisors and the Fiduciary Rule.
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