If you’re considering working with a financial advisor, or even if you’re already working with one, chances are you’ve heard the term fiduciary standard.
But what does it mean — and how does it apply to you and the advisor you’re working with? There can be some confusion, so here’s how to sort it out.
What is a fiduciary relationship?
The fiduciary standard focuses on loyalty and honesty, requiring that fiduciaries act in the best interests of their clients. Specifically, advisors held to the fiduciary standard must ensure the information and recommendations they provide are thoroughly researched and accurate. And, most importantly, advisors who act as fiduciaries must prioritize their clients’ best interests above incentives, commissions or even their firm’s success.
Fiduciary vs. suitability standard
It’s important to note that there’s a clear distinction between investment advisors who are fiduciaries and broker-dealers who need only to follow the suitability standard. The suitability standard only requires broker-dealers to provide advice and direction that is considered suitable at the time — it doesn’t require that they prioritize their clients’ best interests in the long-term, and it doesn’t require that they make recommendations irrespective of their potential commission.
Where can a fiduciary be helpful?
Estates and trusts are key areas where it’s particularly helpful to work with a fiduciary. Accounting for estates and trusts can be extremely technical and require excellent record-keeping and tracking. Fiduciaries must be able to demonstrate through proper accounting that they have handled and managed the estate in an accurate, fair and unbiased manner. If an individual is lacking in knowledge or organizational skills, they are at risk for liability.
Tax planning is also a necessary expertise; it’s imperative that an estate, trust or any taxable portfolio is run in a tax-efficient manner. Fiduciaries must understand how their actions will impact the tax liability on estates or trusts and the beneficiaries. This includes how assets are invested and distributed as trusts are subject to different tax rates and laws than individuals or corporations.
A professional can adeptly advise and maneuver through these technical and sometimes obscure areas. It’s their responsibility to be experts and to stay abreast of changing laws. The professional fiduciary is immersed in this information on a daily basis and is well-equipped to handle complicated processes and can also strategically troubleshoot or advise on unique or challenging situations.
Can I afford to work with a professional fiduciary?
Employing a professional fiduciary is cost-effective, and something you should think about even if you do not consider yourself to be a high-net-worth individual. Your immediate reaction may be that it’s more expensive to hire a fiduciary to handle everything, rather than seeking individual counsel from different experts as needed. However, in many cases, a fiduciary’s cost will be the same or less expensive. One thing is for certain: It’s in your best interest to carefully research your options to select the appropriate fiduciary for your own unique situation.
Christine Graham is vice president of private wealth legal counsel at UMB Bank in Kansas City. She can be reached at Christine.Graham@umb.com.