The word “fiduciary” is being used more and more today. We hear about fiduciary regarding the Department of Labor Fiduciary Rule. We hear about it regarding an investment advisor role as a fiduciary or the lower suitability standard. We hear about companies that are being legally challenged regarding breaching their fiduciary duty to their employees’ retirement plans. You may hear about fiduciary regarding legal proceedings.
So what or who is a fiduciary? A fiduciary is simply a person or organization who, when acting on behalf of another person or persons, is required legally and ethically to act first and foremost in the best interest of the client or party whose assets or issues they are managing.
An investment fiduciary is anyone with legal responsibility for managing somebody else’s money, for example, a registered investment advisor or each member of the investment committee of a charity or retirement plan. You’ve seen the commercials on TV from investment firms where they want you to believe that their company is committed to doing what is best for you. Yet for many of those firms, they have no legal requirement to work in your best interest. Registered investment advisors have a legal and ethical fiduciary duty to clients. Broker-dealers just have to meet the less-stringent suitability standard, which doesn’t require putting the client’s interests ahead of their own. How do you know if your investment advisor is a fiduciary? Ask them – and get them to show you where in their written agreement with you that it specifically says they are a fiduciary.
So, anyone with the legal responsibility of managing someone else’s money is a fiduciary. Typically, fiduciaries are registered investment advisors (not broker-dealers), investment committee members, corporate board members, trustees, and executors. But what about you? Even if you aren’t in the list above, are you a fiduciary? When we sit down with a client or prospective client and ask them about their goals for their assets, the vast majority of the time they tell us that one of their primary goals is to leave or gift money to their children or heirs, to their church, and/or to their favorite charity(ies). At this point, now that they’ve told us that some of their assets will be for someone else, they are now managing someone else’s money. And the definition of a fiduciary is anyone managing someone else’s money.
In this situation, I doubt that you are a fiduciary in a legal sense (we do not provide legal advice). But what about in an ethical sense? If you believe that you have an ethical obligation in managing this money for your heirs, church, and/or charities, then your investment decisions should be in their best interests regarding the assets you plan to gift.
What does that mean you should do? The primary contributor to investment returns is asset allocation. Some studies suggest that asset allocation is responsible for up to 93% of an investor’s returns. The two most important determinants of asset allocation are an investor’s time horizon and risk profile. So for those assets you plan on gifting to another party, the asset allocation of your portfolio needs to best fit their time horizon and risk profile – not yours.
Are you a fiduciary? In cases where you are not a legal fiduciary, you may consider yourself an ethical fiduciary. Are you managing someone else’s money? If you are, consider making investment decisions that are in their best interests.
The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. Advisory services are only offered to clients or prospective clients where Hardy Reed and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Hardy Reed unless a client service agreement in place. Hardy Reed does not provide tax or legal advice, and nothing contained in these materials should be taken as such.
