When you’re just getting started investing your money in the stock market, there’s a good chance that you’ll be working with a person or a company to help you invest. If you are, there’s one word you need to know: fiduciary.
It sounds jargon-y, which can be off-putting, but understanding what a fiduciary is (and how to figure out if you’re working with one) can save you tens of thousands of dollars over your investing “career.”
And, in my humble opinion, anything that saves me tens of thousands of dollars is worth a few minutes of my time.
What does “fiduciary” mean?
In the most basic terms, a “fiduciary” is someone who is legally obligated to act in your best interests when they’re giving you advice, or acting on your behalf. When it comes to someone who’s managing your money, that sounds like a good thing, right?
Well, it turns out, not everyone who manages your investments is required to meet that standard. Instead, the current status quo is that money managers need to recommend “suitable” options for you – not “the best” options for you.
That distinction seems small, but that small difference is where commission fees and conflicts of interest sneak in to snipe your savings.
Here’s an example: You tell your bank’s investment advisor everything they need to know about your risk tolerance, your goals and your investment timeline. Now it’s time for them to recommend some investments for you, and they have two options.
Option number one is a low-cost index fund that suits your goals and your risk tolerance, and costs a paltry 0.3 percent of your invested assets per year.
Option number two is a mutual fund that is just as suitable for your goals and your risk tolerance, but costs a whopping 2.5 percent of your invested assets per year. And if you go with this option, your advisor gets a pretty sweet kickback from the mutual fund company.
If you’re working with a fiduciary, it’s clear that the lowest-cost option is in your best interest, because they’re basically the same product. But if your advisor isn’t held to a fiduciary standard, they’re well within their rights to advise you to take the high-cost mutual fund, since it’s still suitable for your situation.
Yikes.
So … why is this still a thing?!
Well, a bunch of people are trying to make sure that it’s not.
The Department of Labor passed a rule in 2016 to make sure that anyone who manages money in registered retirement account like a 401K or an IRA would have to be a fiduciary. They’re trying to make sure that people’s life savings don’t get eaten up by high fees and advisor commissions.
If that seems like a bit of an overreaction, a government report pegged the cost of those fees and commissions at $17 billion. Every year. So yeah, there’s some savings-eating going on.
This rule is intended to protect your retirement dollars that live in registered accounts, so it doesn’t apply to taxable accounts. Basically, if your investments aren’t in an account that has a fancy government acronym, it’s not protected under this rule, so for those accounts your advisors only have to meet the suitability standard.
So when does this all go down?
The general applicability for the fiduciary standard for your retirement accounts happens on April 10, 2017, but as with any kind of broad legislation, there are conditions about who needs to comply by then – some firms and companies are being given a longer timeline to adjust.
There have also been questions raised about whether this rule will actually happen. Republicans have opposed the fiduciary standard from Day One, on the grounds that it would make financial planning more expensive for people, and be tough on small businesses that rely on the commission business model.
But luckily, even if the rule is rolled back, there’s an easy way to find out whether or not your money managers are acting in your best interest.
Talk to the people who manage your money
The easiest way to find out if your advisor is acting as a fiduciary is to just ask them. I know, simple, right?
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If you get any answer other than “Yes, I am acting as a fiduciary,” they’re not. If they say yes, however, you should ask to see documentation – aka, get it in writing. If they’re really acting to a fiduciary standard, they’ll have no problem with that.
But if they’re not acting as a fiduciary? They won’t give you paper copies of something that says they are, because it’s a legal standard. You could sue them if they confirmed they were a fiduciary and then, you know, weren’t.
If all else fails, get active
Listen, you might be in a situation where your advisor isn’t a fiduciary (yet!), and you’re stuck paying ultra-high-fees on your investments. That’s the worst case, but thanks to technology, you’ve got options. You can check out robo-advisors, which charge low fees to manage your money, and you can even look into buying ETFs and index funds yourself when you’re ready.
There’s no reason to stay locked in with a non-fiduciary advisor these days, even if you aren’t willing to pay up in cash for unbiased advice just yet.
For more on the difference between financial advisors and fiduciaries, check out GenFKD’s interview with Elliot Weissbluth.
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