Fiduciary Redux

It seems like every year or so, we write an article about Fiduciary Standards and how some financial firms try to confuse a simple idea. With new Department of Labor regulations (which may or may not go into effect in April) we are in for a new round of confusion. Therefore I think that this is time to review the Fiduciary Standard and to provide some context for news stories that you will see over the next several months.

What is a Fiduciary Duty? A Fiduciary Duty is a legal concept which traces its history to English common law and even to Roman law. Simply put, a Fiduciary Standard of Care represents the highest level of care. It is a Principles Based standard of conduct (as opposed to a Rules Based standard) meaning that a Fiduciary is bound to act in the best interest of his or her clients whether or not there is a specific regulation covering a situation.

Why is the Fiduciary Standard in the News? In an effort to curb abuses by some financial service providers, the Department of Labor, acting under the provisions of the ERISA act of 1974 which regulates employee retirement savings, has proposed the ‘Fiduciary Rule’.

Under the proposed DOL fiduciary rule, all financial advisers will be required to recommend what is in the best interests of clients when they offer guidance on 401(k) plan assets, individual retirement accounts or other qualified monies saved for retirement. (Note that the rule does not apply to after-tax investment accounts that may be earmarked as retirement savings or to annuities or insurance that are not in retirement plans.) Advisers will have to document that their recommendations regarding IRA rollovers are in the best interest of the client.

While consumers might have believed that financial salespeople were already making recommendations in the best interest of customers, the immediate aftermath of the rule is instructive. Even before the proposed rule has gone into effect, Merrill Lynch and Edward Jones have ended backdoor payments from mutual funds to brokers for funds held in IRAs. Even if the proposed regulations never go into effect, they have resulted in changes.

While the goal of having all financial advisors work in the best interest of their clients is one that we whole heartedly endorse, we are skeptical about the proposed changes. Trying to codify a principles based standard will allow some firms to check the boxes and claim to be fiduciaries. This dilutes the term Fiduciary and creates confusion.

Over the next year you are likely to hear more and more financial salespeople defining themselves as Fiduciaries. According to the Rules, they are right. At Armor, our commitment has been and remains on the Principle. Our commitment to the Principle is defined by our Fiduciary Pledge:

We will always put the clients’ best interests first, ahead of our own and those of our firm and its employees. We will always act as a fiduciary.

We will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional. When selecting investments, we will act as the client’s agent, seeking the best investments at the best prices at all times.

While neither we nor anyone can promise superior investment returns, we will provide impartial advice.

We will always be truthful with our clients, providing full and fair disclosure of all important facts, including our compensation from all sources, as well as fees we pay to others on our clients behalf.

We will always seek to avoid conflicts of interest. We will fully disclose any potential conflicts, and place the client’s interest first at all times.

Nothing contained in this publication is intended to constitute legal, tax, securities or investment advice, nor an opinion concerning the appropriateness of any investment, nor a solicitation of any type and does not guarantee future results. The information contained in this publication should not be acted upon without specific legal, tax and investment advice from a licensed professional. Past results are not indicative of future performance.