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What is a Fiduciary?

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What is a Fiduciary?

If you have retirement accounts and keep up with financial news, you’ve probably heard of the new DOL Fiduciary Duty Ruling.

The Department of Labor has created a ruling that would require any financial professional to act under the fiduciary standard when dealing with retirement accounts rather than the current suitability standard.

Today, we are going to talk in more detail about the fiduciary standard and how this may affect you as an investor.

What is a fiduciary?

A fiduciary is any professional or organization that is bound to an ethical standard of working in their client’s or customer’s best interest, putting the client’s interests above their own.

Individuals that are considered fiduciaries that you may have either worked with or know of are bankers and lawyers.

There are also legal ramifications to being a fiduciary. When an individual or organization knowingly accepts a fiduciary duty or responsibility for their client, they are now required to act in their best interest.

For financial advisors, this means that they make investment and financial planning decisions that benefits the client and is not for their own profit or own personal benefit. This means that a financial advisor ensures that no conflict of interest would happen between a themselves and a client.

For example – if a financial advisor also happens to own real estate, and that real estate is in a specific Real Estate Investment Trust, it would be a conflict of interest for that advisor to suggest that you invest in that REIT.

Why is the DOL Fiduciary Ruling important?

As an investor, the DOL’s new ruling may seem like it won’t affect you. However, if you have a retirement account and are currently working with a financial advisor, this new ruling may affect your relationship with your advisor.

Broker-dealers and other advisors not currently held to the fiduciary standard do not need to disclose how they make money. Often, they are paid on commissions from the investments that they make for you as the investor. Since they are not a fiduciary, they may pick the investment that offers the highest pay-out for themselves even though it might not be in the best interest for you as an investor. The suitability standard that these individuals are held to merely means their investment recommendations need to meet the client’s defined need and objective. There is no need to exceed it.

With the new ruling, however, these individuals will have to clearly disclose any conflicts of interest as well as the dollar amount of any fees and commissions that they earn. This means that you will be sitting on the same side of the table with your advisor, having more knowledge about what you are paying for and how your advisor is making money.

What are considered retirement accounts?

This DOL ruling will only affect advisors who manage retirement accounts. These accounts include:

  • Defined contributions plans, such as 401(k)s, 403(b)s, employee stock ownership, Simplified Employee Pension (SEP) and savings incentive match plans (SIMPLE IRA)
  • Defined-benefit plans
  • Individual Retirement Accounts (IRAs)

What’s not covered by the ruling includes:

  • Non-qualified investment recommendations – such as stocks or bonds the client owns but not held in a retirement account

What can you expect as an investor when the ruling takes effect?

If you are currently working with a fiduciary, you will probably not see much of a change.

If you are not working with a fiduciary, you will probably get a lot of paperwork and other communication from your advisor, discussing changes to your accounts as well as any disclosures they will be required to give you.

If you are currently working with us at GuideSpring Wealth Strategies, LLC, we are already fiduciaries and this ruling should not have any effect on our clients.

*Note – the ruling was supposed to take effect on April 10th, 2017, however, President Trump has asked for a review of the ruling which may delay it. The new date for when it might take effect is not clear with sources saying anywhere between 60 to 180 days after April 10th. We will update this post when the official date is decided.

For more information about the ruling, you can visit the DOL’s site.

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