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What is a Fiduciary?

What is a Fiduciary?

You may have heard about the new fiduciary rules being enacted in 2017 and question how these new rules may affect your account(s). The Department of Labor (DOL) has extended their regulatory oversight from 401k plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) to include Individual Retirement Accounts (IRA’s). The simplest way to understand this act (ERISA) is that it establishes minimum standards for retirement accounts to protect employees, and employers.

In my opinion, the most important aspect of the new regulations is the requirement that we act in a fiduciary capacity rather than using the suitability standard when offering advice on retirement accounts. The suitability standard, which has been used by our industry for decades, simply requires that our recommendations were suitable at the time they were made. The fiduciary standard on the other hand, is a legal requirement that we act in your best interest. Many brokers and insurance agents call themselves “financial advisors” or “financial planners,” but they may not have a fiduciary duty and in fact may not be required to put your interests first.

One example of a fiduciary is a fee-based financial advisor. Stock brokers and insurance agents acting on another party's behalf are not currently considered fiduciaries. One potential way to differentiate between the two is a fiduciary will typically charge a fee for the advice and/or services provided and an individual operating under the suitability standard will earn a commission from a third party for the sale of a product or investment.

The DOL believes that contrary to legislative intent, advice is being given without fiduciary accountability that may not be in the best interest of investors. An example might be a stock broker who recommends Mutual Fund A over Mutual Fund B because it pays a higher commission. Both funds may meet the suitability standard, but because the stock broker is not acting in a fiduciary capacity, they are not required to act solely in the investor's best interest. Another example may be a life insurance agent who holds themselves out to the public as a financial planner or financial advisor without holding the proper credentials. I see this quite often from various entities that offer seminars on various financial planning topics.

A fiduciary has a legal obligation to act in the best interest of their clients. All of the LPL financial advisors at Chaney and Marin Financial Planning have the credentials and registrations to act as a fiduciary. However, many individuals calling themselves financial advisors may not have the credentials or registration to act in a fiduciary capacity. To find out if your advisor or investment firm have these qualifications, visit and click on the “Broker Check” link. A registered financial advisor able to operate under a fiduciary standard will be registered and have passed the Series 65 or 66 exam. Also, this site will list any consumer complaints / disciplinary actions as well as employment history.

Although the new federal oversight only applies to retirement accounts, I believe it will eventually apply to all investment accounts and annuity contracts that pay interest based on the performance of the stock market. After all, why should we be required to act in your best interest on retirement accounts but not your other investment accounts? I like the fact the new rules apply to the type of account in which advice is being rendered rather than attempting to regulate the numerous individuals with varying licenses who offer services in the area of retirement and estate planning.

I am in no way conveying that commissioned based products are bad. Many individuals will be better served in a commission-based account rather than a fee-based account. An example would be a person that owns a portfolio of stocks whose intention is to simply hold the positions, regardless or market conditions. In this case it would not make sense to convert the commissioned based account to a fee-based account. A fee based account would incur on-going fees when no active management is taking place. Fortunately, the DOL recognized this issue and has created an exemption to the fiduciary rule for cases as the one described. By executing a Best Interest Contract Exemption or BICE, the financial advisor can receive commissions, but is still required to acknowledge fiduciary status and act in your best interest.

I am fortunate to be affiliated with LPL Financial during this transitional phase in our industry. LPL Financial has lead the charge in developing new strategies and opportunities to address the new rules and regulations. They have invested their vast resources in technology and other efforts to help us stay compliant. Phased implementation of the new rules began June 9, 2017 and will be fully implemented by the end of 2017. If your account(s) will be affected, we will reach to you if we have not already done so. In the meantime, rest assured, at Chaney and Marin Financial Planning, LLC, our client’s best interests always come first.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. It is not intended as authoritative guidance or legal advice.

Thomas Chaney / LPL Financial Advisor

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