The person to whom property or power is entrusted for the benefit of another is a fiduciary. A few examples of fiduciary roles include trustee of a trust, executor under a will, or guardian for an incapacitated person. The law imposed upon fiduciaries requires them to act in the best interest of the beneficiaries they serve. This duty imposes a high standard of care upon fiduciaries. Fiduciary duties are important due to the gap in knowledge and experience between professional advisors and non-expert consumers of these services.
The core duties of an advisor who is a fiduciary include:1
Serving in the client’s best interest. A fiduciary puts the client’s interest ahead of its own, the firm, or any other individual or entity.
Acting in the utmost good faith. A fiduciary must be honest and accurate to the best of its knowledge in all communications. These communications may be written or verbally communicated to the client. The disclosure of conflicts of interest and mistakes made while serving the client must be made clear to the client.
Acting prudently—with the care, skill, and judgment of a professional. Acting prudently, or with due care, requires following a process and having the knowledge to make appropriate recommendations.
Avoiding conflicts of interest. Fiduciaries are required to make complete, clear, and timely disclosure of all material facts and conflicts pertaining to financial incentives, benefits, and compensation that will interfere with a fiduciary giving unbiased advice.
Disclosing all material facts. A prudent fiduciary will investigate and assess not just the financial performance of an investment or firm based on objective criteria and quantifiable data, but also act with due care. The prudent fiduciary will also take into consideration all of the client’s circumstances to determine the most appropriate recommendations.
Controlling investment expenses. The fiduciary is required to ensure that all fees, costs, and expenses passed on to the client are fair and reasonable for the services and investments offered. Recommendations that encompass excess, unnecessary, or inappropriate expenses breach the fiduciary’s duty of loyalty.
Managing your trust and its assets
Perhaps one of the best examples of the importance of working with an advisor who is a fiduciary is when it comes to the management of your trust and its assets. While an individual can certainly be named as your trustee, working with a fiduciary company provides several benefits.
First, the company should have technical expertise as a fiduciary integrating the areas of tax planning, investing, and trusts. And, because it is their business, trust companies possess detailed knowledge of all of the applicable tax and trust laws, regulations, and the fiduciary duties imposed upon them. In contrast to an individual or family member serving as the trustee, a trust company will have the time and resources needed to administer a trust or estate pursuant to the terms of the governing document, and to research and manage the trust’s assets.
A trust company also has an unlimited duration so it can manage your family’s assets for generations. Since the trust company has no ownership interest in the assets, it can deal impartially with beneficiaries, treating all beneficiaries fairly and equitably in accordance with the trust’s terms. A trust company has the expertise and continuity to manage sometimes competing needs through generations.
Investment standards are important for protecting your interests
A fiduciary is required to make all decisions and take any actions based solely on the client’s best interest. In contrast, nonfiduciary investment advisors managing investment accounts have historically been held to a “suitability” standard, which means that a broker/dealer or registered investment advisor had to reasonably believe that any recommendations made were suitable for clients in terms of financial needs, objectives, and circumstances. In contrast, a fiduciary may determine that something that is suitable might not be what is actually in the client’s best interest.
The new Regulation Best Interest is a misnomer and uses the fiduciary terminology of “best interest” but does not provide a fiduciary standard to these nonfiduciary investment advisors. Instead, it is essentially “enhanced suitability,” which does not generally require the advisor to act based solely upon the client’s best interest nor protect an investor to the same degree as a fiduciary standard.
In an age of volatile global markets and uncertain economic policy, establishing a trusted relationship with an experienced fiduciary is important to helping you preserve and protect your wealth for generations to come.
1 Institute for the Fiduciary Standard, www.thefiduciaryinstitute.org/wp-content/uploads/2013/09/InstituteSixCoreFiduciaryDuties.pdf.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This article is not designed or intended to provide financial, tax, legal, accounting, investment or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
Investing involves risks and you may incur a profit or a loss. Past performance cannot guarantee future results. There is no assurance the any investment, financial or estate planning strategy will be successful.
The information in this article has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates and projections constitute the judgment of Wilmington Trust and are subject to change without notice.