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What is a “Fiduciary”?

June 6, 2019

There has been a lot of talk in the financial world about the Department of Labor's (DOL) Fiduciary rule. The term fiduciary refers to someone acting in the best interest of someone else. You would expect your lawyer to be working for you and acting in your best interest. You would expect your CPA to be putting your best interests ahead of their own. It would stand to reason that your financial professionals are acting in your best interest as well. People are shocked to learn that not all financial professionals have to act in their clients best interests. Recent actions by the DOL were attempting to regulate and codify the rules for investment professionals but the current administration wasn’t as interested in pushing that legislation through and several court cases have hurt the fiduciary rule. So most financial advisors are not actually fiduciaries nor do they have to.

 

I like to use the analogy of shopping for a car. If you walk into a Ford Dealership, you would expect them to try and sell you a Ford. You wouldn’t expect them to pitch you a GM Product. But let's imagine you are a busy professional and don’t have time to search, test drive, and negotiate a new car purchase. You hire a Car Buying Specialist. You understand that they will get a commission from the dealer where you eventually buy the car. Your car specialist recommends you buy from dealership A because it is best for you. But, later you find out that the Car Buyer Specialist received a significantly larger commission from Dealership A instead of any of the other car dealerships. Was that Specialist acting in your best interest or their own? It is possible they were, but the transaction is certainly tainted.

 

I am not suggesting that a non-fiducIary professional is bad but you should be asking additional questions at your meetings. How do they get paid? What products can they sell to you? How do they choose their product line up. And if the advisor is coy, evasive, or says things like “Don’t worry about it, the company I place the business with pays me. You don’t have any out of pocket costs” Run. You are getting into a very non-fiduciary relationship.

 

Most advisors have documents that explain any “Conflicts of Interests”, and they should provide them to you. A good advisor should have no problem explaining how they get paid.I always tell people that no one in the financial world is a charity. They have to make money to survive and you expect your financial professionals to earn a living. You just want it to be above board, clear, and mutually beneficial.

 

For my eBook on the topic, go to my website www.theathenagroup.com and click on Reports.

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