What is a Fiduciary?

 
February 14, 2017

What is a Fiduciary?

Recently, President Trump announced plans to undo the Department of Labor’s Fiduciary Rule. This was a rule intended to protect investors’ retirement funds by holding advisors to a “fiduciary standard,” meaning that the advisor’s actions must be in the best interest of the client.

Currently, advisors not registered with the SEC may dispense financial advice that is only held to a “suitability” standard. Often, these advisors are compensated for the advice they provide by earning commissions on the assets they sell to their clients. This is currently allowed, as long as they can deem the products “suitable” in some way, even if the investments are not exclusively in the clients’ best interest.

Imagine a car salesman selling an expensive 2-seat sports car to a family of 5. The salesman, motivated by the high commission, justifies the sports car as “suitable” because it is technically a mode of transportation. A more optimal solution for the family might be a lower-priced minivan, but this would earn the salesman a lower commission. Acting only on a “suitability” standard, the salesman can sell the family the sports car because he does not need to act in the best interest of the family.

Opponents of the Fiduciary Rule argue it would limit investor’s choice of advisor. We think it would be crazy to choose an investor that does not act in their best. Too often, we see prospective clients’ portfolios jam-packed with “suitable” yet inappropriate investment products that command high commissions for the selling broker. While the fate of the Fiduciary rule is unclear, we believe that it would be a positive development for investor welfare.

At Nelson Roberts Investment Advisors, we have always held ourselves to a fiduciary standard and not just for retirement accounts. We do not sell products or collect commissions. Our business model has always been to act in clients’ best interest.

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