Hiring someone to manage your financial assets can be challenging. A continually changing investment landscape and often-complex products offered by well-marketed providers can make it difficult for investors. How can the investor limit their risk and ensure industry best-practices are used in the management of their portfolio? One answer is to make certain your adviser is a true fiduciary.
Foster Group is the only adviser firm in the states of Nebraska and Iowa, and one of approximately 90 worldwide, to hold certification as a registered fiduciary through The Centre for Fiduciary Excellence (CEFEX). Annual re-certification is required to maintain this status; we’ve done this each year since 2007.
The word “fiduciary” comes from the Latin “fiducia,” meaning “trust.” It refers to an individual or an entity with the power and obligation to act for a beneficiary under circumstances requiring total trust, good faith and honesty. Characteristically, the fiduciary has greater knowledge and expertise about the matters being handled than does the beneficiary. A fiduciary is legally held to the highest standards of conduct and trust.
The Department of Labor (DOL) recently published a rule requiring financial professionals and companies who provide investment services and retirement plans to operate according to a “fiduciary” or “best interest” standard.
The point of the rule is simply to require that advisers act in the investor’s best interest, and disclose any and all compensation arrangements that may benefit the adviser, rather than the investor, in recommending one investment over another. It does not mean an adviser cannot receive reasonable compensation for his or her work.
While some advisers, like Foster Group, embrace transparency and true fiduciary accountability, many do not. The response to this rule has been varied, with a number of investment providers, lobbying groups and some politicians coming out against it. While the rule may not be perfect in its present form, we believe its goal should be embraced by industry and investor alike. All parties – investors, advisers and financial service companies – ultimately benefit by making this standard easily understood and implemented.
Many reasons have been offered by those preferring not to operate according to a fiduciary standard. Remember the main issue for investors, though; would you rather have an adviser guide you in a way that is solely in your best interest, or something less?
How would an investor know if their advisers adhere to this fiduciary standard? Three criteria, provided by the DOL, suggest that to demonstrate compliance, advisers and/or financial services firms should:
- State, in writing, that the firm commits to providing advice in the client’s best interest at all times
- State, in writing, that the firm has adopted policies and procedures designed to mitigate conflicts of interest
- Clearly and prominently disclose any conflicts of interest, like less-than-transparent fees or backdoor payments that might prevent, or provide a disincentive to, the adviser from providing advice in the client’s best interest
Among other things, CEFEX-certified adviser firms are expected to:
- Demonstrate awareness of fiduciary duties and responsibilities
- Identify conflicts of interest and address such conflicts in a manner consistent with the duty of loyalty
- Identify an appropriate risk level for each client
- Utilize investment policy statements which contain sufficient data to define, implement and monitor the client’s investment strategy
- Document decisions regarding investment strategies and types and make such decisions in a manner consistent with fiduciary obligations of care
- Conduct periodic reviews to ensure investment-related fees, compensation and expenses are fair and reasonable for the services provided
We’re absolutely committed to acting as our clients’ fiduciary. We think you deserve, and should expect, nothing less.