• FPG

How the Fiduciary Standard Protects You

Updated: Sep 9, 2019


by FPG


When investing, you want to be certain that your financial advisor has your best interest at the forefront of their mind. Several laws have been enacted to guide the behavior of financial advisors on behalf of their clients. Chief among these is the fiduciary standard set out in the Investment Advisers Act of 1940 that sets several basic standards of behavior your investment adviser must follow to act in your best interest.


Here is a more detailed explanation on when it applies and what it entails:


The Law and Standards


There are two sets of standards financial advisors operate under. Insurance salespeople, brokers, and standard financial representatives are held to a "suitability standard." The "suitability standard" has two main rules that an advisor must follow. They must (1) know your financial situation and (2) recommend suitable financial products for your situation.


The fiduciary standard is much more rigorous and offers a great deal more client protection. It applies to anyone who is a fiduciary under the Employee Retirement Income Security Act (ERISA) or Registered Investment Adviser (RIA). They must act in the following manner when advising you on investment products: Act with your best interests in mind; your interests have to take precedence over their own.


All acts must be performed with skill, intelligence, good judgement, due diligence, and must be handled in a professional manner. All important facts must be explained and at no time should an advisor seek to mislead you or hide information. Conflicts of interest are to be avoided. Conflicts of interest that are unavoidable should be explained honestly and handled in the client's best interest.


Conclusion

Clearly the Fiduciary Standard offers you a great deal of protection from financial mismanagement. It requires an investment advisor do more than simply conclude if an investment is a suitable one for you to make. They also have to consider how the investment is constructed, whether fees are reasonable, any legal requirements, any conflicts of interest that may arise, and must act in general good faith.

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