What is a fiduciary agent?
In general, a fiduciary agent is a person who has the duty to act in the best interest of the other party. In the case of a financial advisor, the advisor working in a fiduciary capacity has an obligation to put the interests of their client first when providing advice, as well as in all aspects of the relationship between the client and the advisor.
What is the fiduciary standard?
The fiduciary standard defines who is classified as a fiduciary and governs what investment advisors do concerning certain criteria. It states that investment advisors who are fiduciaries must always put their clients’ interests ahead of their own. It is not a set of fixed rules but offers exceptions to describe the types of transactions that are permissible.
What is the best interest standard?
Reg BI is a regulation enacted in 2019 by the SEC and enforced by FINRA. Reg BI stipulates that securities brokers and others working with clients must act in the best interest of the clients when making recommendations about investments and products. Reg BI also requires brokers and advisors to complete a client relationship summary known as Form CRS. This summary documents the client’s relationship with the broker or advisor as well as the nature of the relationship between the client and the firm. It also discloses any conflicts of interest that may affect the client, the firm’s plans to meet Reg BI’s documentation requirements, and any disciplinary actions directed against the firm or the broker or advisor.
Fiduciary rule versus best interest regulation
The best interest standard is similar but slightly different from the true fiduciary standard. Here’s how these standards differ:
Best interest standard:
- Applies to investment advisors; however, the prohibited compensation provides a beneficial exemption for subscribers, but with any compensation, the advisor must disclose it and cannot blame the client’s head.
- Requires fiduciary advisors to put the client’s interests first, regardless of anything else.
Fiduciary rule:
- Applies to RIAs, whereas the new exemption applies to a number of other financial institutions including brokers, banks, and insurance companies.
- Prevents conflicts of interest with the client; however, the new exemption creates some situations where the advisor can receive compensation for an investment product as long as they meet certain requirements.
How does the fiduciary rule affect individual investors?
There is no definitive and comprehensive fiduciary rule in truth. The exemption from prohibited transactions affects investors who are working with an advisor or broker and seek to roll over funds from a 401(k) retirement plan or a similar retirement plan into an IRA account. It also affects those seeking advice on how to invest in an IRA account.
Do I need a fiduciary agent?
If you are looking for an advisor that is required to act in your best interest at all times, the answer to this question is yes. All RIAs who work with the SEC must adhere to the fiduciary standard. Reg BI and the new exemption from prohibited transactions shorten the fiduciary standard.
Before working with a financial advisor, ask them if they are fiduciaries in all aspects of their dealings with you. Request details on how they are compensated and insist that this is put in writing.
The fiduciary rule and the exemption from prohibited transactions are steps in the right direction. However, advisors working under these rules are generally not true fiduciaries. Investors should take some time to understand whether an advisor is a true fiduciary and then decide if that advisor is appropriate for their financial situation.
Source:
https://www.thebalancemoney.com/new-investment-fiduciary-rule-4140367
Leave a Reply