Simply put, a fiduciary acts on behalf of another person to make decisions, especially decisions about money. A fiduciary may be a person (like a lawyer or financial adviser) or an organization (like a bank). You can appoint someone as a fiduciary for general purposes, or you may create a fiduciary relationship by engaging someone to perform a particular task or set of tasks on your behalf. The determining factor in forming a fiduciary relationship is whether the client has placed absolute trust in another for some purpose. For instance, an attorney has a fiduciary relationship with his or her client – the attorney is empowered to make decisions about the pursuit of a case. Because of the trust that the client places in the fiduciary, the fiduciary is held to the highest standard of care. This standard of care ensures that the fiduciary does not abuse the trust or misappropriate or misuse any assets commended to his or her care.
While a financial adviser may be a fiduciary, not all financial advisers are fiduciaries. A financial adviser who is not a fiduciary will be held to a suitability standard, which means only that the adviser must reasonably believe that the advice is suitable for the client’s needs. To meet the suitability standard, the adviser must perform “adequate” research into a potential investment and into the client’s financial situation. Further, a nonfiduciary adviser’s duty to a client ends with the specific transaction for which advice was sought; the adviser has no duty to continue monitoring the transaction .
The Obama administration proposed a rule that would have required all financial professionals, including those engaged in retirement planning, to adhere to a fiduciary standard. Among other things, the standard would have required all financial advisers to reveal any possible conflicts of interest and to fully explain their fees. The rule was meant to ensure that financial advisers put their clients’ interests ahead of their own. However, in the spring of 2018, a decision by the Fifth Circuit put an end to the rule, declaring it an “arbitrary and capricious exercise of administrative power.” It seems unlikely that this rule or any similar regulation will be implemented in the near future. In the absence of a clear rule, it is important for individuals making investments or planning for retirement to understand if their advisers are acting as fiduciaries or if they may follow lower standards.