I am seeing more and more references to the term “fiduciary” in newspaper articles, in online advertisements, and in news reports. Do you know the answers to the following questions? What is a fiduciary? Why are fiduciaries important? Why are fiduciaries in the news?

Definition (fi·du·ci·ar·y)

Fiduciary responsibility is not an exciting subject, but it is an extremely important one. The concept of fiduciary responsibility has developed over the last several hundred years, from the 1500s Common Law in England to the present-day U.S. Securities and Exchange Commission (SEC).

A simple way to think about it is a fiduciary is a person or organization that has a duty of loyalty and care and looks out for the best interest of another in making financial decisions. Because a fiduciary represents the interests of other people, its core principle is trust.

The Certified Financial Planner™ (CFP®) Board of Standards (the keeper of the CFP® designation) defines a fiduciary as follows:

“One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client.”

Why is This Important?

In the investment world, acting as a fiduciary is considered the gold standard of care toward clients. This begs the question: Aren’t all people who deliver investment advice fiduciaries? The answer is “no,” they are not all fiduciaries.

Within the industry, not all who deal with other people’s money are required to place clients’ interests above their own. Financial professionals, commonly titled Financial Advisors, are not all governed by the same rules and regulations. Even though many identify themselves as a Financial Advisor, only a Registered Investment Advisor (RIA), who is supervised by the U.S. Securities and Exchange Commission or its state equivalent, is required to act solely in a client’s best interest. This standard was established as part of the Investment Advisors Act of 1940.

Other financial professionals have their own supervisors. Insurance agents come under the rules of their state insurance commissioner while broker-dealers are supervised by FINRA (Financial Industry Regulatory Authority). FINRA’s regulations require broker-dealers to make “suitable” recommendations to their clients.

This means that while a broker-dealer must legally make recommendations that suit a client’s financial needs, those recommendations might not be the best course of action. A broker-dealer’s loyalty is to the brokerage firm he or she works for.

Why are Fiduciaries in the News?

Acting as a fiduciary requires a very high level of care, a high level of expertise, and a commitment to placing a client’s interests first. Unfortunately, many areas of the investment world have not adopted this principle. The U.S. Department of Labor (DOL), which supervises company retirement plans, instituted a new rule last year in spite of notable opposition requiring all financial professionals who provide advice for investments held in Individual Retirement Accounts (IRAs) to act as a fiduciary. It may be hard to believe, but many people who provide investment advice for IRA accounts are not currently held to a fiduciary standard. This new “Fiduciary Rule” was scheduled to go into effect on April 10, 2017.

What is the Status of the Department of Labor’s New Fiduciary Rule?

President Trump signed a Presidential Memorandum on February 3, 2017, directing the Department of Labor to reassess the Fiduciary Rule and to modify or replace it if it is determined to cause harm to investors or firms. The financial industry strongly opposes this rule; it argues that the Fiduciary Rule is too complex and costly and that the cost would have to be passed on to investors. This, they say, could price investors with modest assets out of the advice market.

The Department of Labor has since delayed the implementation of the new Fiduciary Rule until June 9, 2017. It is not known at this time if the rule will ultimately be implemented, modified, or cancelled.

The Bottom Line

If you are looking for someone to help you with your finances or if you currently have someone helping you with them, can you afford not to have that person acting in your best interest—acting in the capacity of a fiduciary?