Your Money & Your Life

A Word A Day 

The title of this article comes from a newspaper feature offered back in the day to expand readers’ vocabulary and comprehension. Perhaps you’ll allow me to reprise the concept with fiduciary, a word I believe every investor should understand. I addressed the topic in 2024, but recent judicial actions spurred me to do so again.

An attorney friend describes a fiduciary relationship as “working on behalf of a client in utmost good faith.” Cornell Law School’s Legal Information Institute offers a more nuanced definition, including duties of care, loyalty, confidentiality, and prudence. In an investment context, a fiduciary duty of care can apply in either of two ways. For some financial advisors, it is owed to you, the client. For others, it is the opposite: salespeople working for insurance companies and brokerage firms owe that duty of care to their employer, not their customer.

In most business situations, the nature of the buyer/seller relationship is reasonably clear. For example, at most car dealerships, the salesperson represents the dealership, not you. Regardless of that person’s title, their job is to sell a car at the best price for the dealership, while you’d probably prefer to pay something less.

Unfortunately, relationships are less transparent in the world of financial planning and investments. In part, that’s because securities salespeople are allowed by their regulators (who come from the industry itself) to call themselves pretty much anything they want: advisor, planner, consultant. However, regardless of title or designation, most financial advisors are not fiduciaries. According to data from U.S. brokerage industry regulator FINRA, around 88% of them are licensed as brokers or insurance reps. They operate under what’s known as a suitability standard—meaning they must have a reasonable basis to believe that any recommended investment strategy or security is appropriate for a client. The other 12% or so of advisors are regulated by the Investment Advisers Act of 1940 and are legally bound to act in their clients’ best interests.

Research conducted by the University of Southern California found that about 9 in 10 Americans believe their advisor is required to act in their best interests. To address the issue—at least for retirement accounts—the Department of Labor introduced new rules in April of 2024 that would have extended fiduciary obligations more broadly. However, legal challenges brought by the American Council of Life Insurers and other industry groups led federal courts in Texas to put the rule on pause. In February of this year, the Fifth Circuit effectively halted its implementation.

The regulatory landscape remains unsettled, but if you’re interested in a more detailed view of the situation, here’s a link to an article published by the Consumer Federation of America: Financial Advisor or Salesperson? Or, if you’d prefer a more entertaining approach, you might watch John Oliver’s June 2016 segment on retirement plans. In it, he walks through what can happen when incentives and advice collide—with results that are both humorous and instructive.

Regulation alone may never produce truly conflict-free advice. Some firms take the view that disclosing conflicts is enough. For example, they may note that one investment product pays a higher commission than another and consider that sufficient transparency. A fiduciary standard goes further. It is not simply about disclosure—it’s about managing conflicts or avoiding them altogether. In medicine or law, for example, professionals are expected to act in the client’s best interest, not simply explain why they might not be doing so. To determine where an advisor’s allegiance lies, investors can ask for their advisor’s commitment in writing. True fiduciary advisors are happy to sign a fiduciary pledge affirming their obligation to act in your best interests.

In closing, let me quote a New York Times op-ed piece submitted by U.S. Senator Tammy Duckworth titled Isn’t Honesty the Best Policy?

"If the fiduciary standard is good enough for medical care, legal advice, and accounting, it is good enough for financial retirement advice. We don’t accept less anywhere else in commerce. Why should we accept it from those we trust to protect our retirement savings?”

Perhaps it would be worth finding out if your advisor puts your interests first, as DCM has been doing for thirty years.

Warren Ward, CFP®
Senior Investment Advisor

To learn more about Warren or read his previous articles, visit his profile page here.  

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