What is a Fiduciary Duty?

Does your financial advisor have a fiduciary responsibility to you? This is one of the best questions to ask anyone that you’re considering managing your money, but many investors just are not aware of this responsibility. Read this Forbes article that explains more about this important concept that every investor should understand before entering any relationship with a financial professional.

Just what is a fiduciary obligation? A client’s best interest must be put first in making investment decisions when a fiduciary responsibility exists; the advisor is legally obligated by this standard. As the article explains, when the CFA (Certified Financial Advisor) designation is prominent in marketing materials provided by brokers and other financial professionals, investors assume that a fiduciary relationship exists. While the CFA Institute promotes putting the client’s best interests first, a fiduciary responsibility is not required for the CFA designation. The article, written by former SEC attorney Edward Siedle, says:

While CFA Institute expects charterholders to subscribe to a fiduciary standard, many in the brokerage industry are in positions in which they and their employers specifically do not accept this high standard of care. Instead, brokers often subscribe to a more lax “suitability” standard–meaning they are free to promote products that benefit the broker, and brokerage, more than the client, as long as those products are not blatantly unsuitable.

The difference between the suitability standard and the fiduciary duty is substantial. This doesn’t mean that a financial professional with the suitability standard won’t do a good job for you. You should, however, understand the difference between the two standards, and know which relationship exists when you are working with any financial professional. Always remember that not all credentials legally obligate a financial advisor to put your best interests first.