What is a Fiduciary?

A fiduciary is an investment professional who is legally required to act in a client’s best interest. An example is a state Registered Investment Adviser (RIA) who is required to act in a client’s best interest at all times. Broker-dealers are required to act in a client’s best interest at the time of recommendation. This distinction is not obvious and is the result of recent regulatory actions described below.

Fiduciaries in practice

A financial professional who acts in a fiduciary capacity:

Makes the effort to thoroughly understand a client’s objectives and risk tolerance, and then uses a documented, objective process for evaluating and recommending appropriate investments.

Discloses before the fact any potential conflicts of interest that could affect his or her ability to serve in a client’s best interests.

You should always ask questions that require full and honest disclosure of potential conflicts of interest. If you are unsure of the status of anyone managing your  money or giving you financial advice, ask if they are doing so as a fiduciary. If they avoid a direct answer, consider that a red flag.

Fiduciary oaths

Here is an example of a fiduciary oath:

I believe in putting a client’s best interests first. Therefore, I commit to the following five fiduciary principles in a document which I will sign upon request for any client:

I will always put your best interests first.

I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.

I will not mislead you, and I will provide conspicuous, full and fair disclosure of all relevant and important facts.

I will avoid any conflicts of interest.

I will fully disclose and fairly manage, in your favor, any conflicts that are unavoidable.

Fiduciaries and the state of North Carolina

In North Carolina, where I live, fiduciary duties are defined in 18 NCAC 06A.1801 as a:

Duty of care.

Duty of loyalty.

Duty of obedience.

Duty to act in good faith.

Duty of disclosure.

You should choose a fiduciary if:

You want to be assured that your adviser is making recommendations based solely on your best interests.

You want these recommendations to be based on your investment portfolio and how that integrates into your total financial circumstances.

You are willing to pay your adviser directly for his or her services.

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