As an investor, its important to know whether or not the person providing you with advice is a “fiduciary.”

Why is this important? Because a fiduciary relationship requires the professional to act in the sole interest of the client. A fiduciary can’t push you into a fund just because she’ll get a nice commission for the sale. She can only invest in that fund if it’s the best choice for your portfolio, based on your goals, risk tolerance and other material factors.

Let’s learn more about what fiduciary means, and what types of professionals offer fiduciary service.

The Meaning Of Fiduciary

Fiduciary comes from the Latin word fides. meaning “trust.” The 1830 Massachusetts court decision, Harvard College v. Amory. established the legal definition of “fiduciary” in the U.S. This ruling also gave rise to what’s known as the Prudent Person Standard: a person managing someone else’s money must execute the same level of diligence and care as she would to manage her own assets.

The Prudent Person Standard expresses the core meaning of the fiduciary obligation. It’s a central feature of the Employee Retirement Income Security Act, or ERISA. the set of regulations that governs pensions and retirement plans.

Who Is – And Is Not – A Fiduciary?

Registered Investment Advisors (RIAs) are normally held to the fiduciary standard. Brokers typically are not.

This doesn’t mean you should avoid securities brokers when you make investment decisions. You just need to be aware that the broker is not necessarily recommending the best of all available choices, because the broker is not held to the fiduciary standard.

The way brokers and RIA’s are paid highlights the difference between their standards. Brokers earn a commission on the products they sell, so there’s a natural incentive for brokers to sell products that pay them higher commissions. RIAs are typically paid a flat fee, expressed as a percentage of the total portfolio. They don’t collect commissions. (Their fee might run between 0.5% and 1.5% of the total assets under management, depending on the services provided).

Again, remember that a fiduciary obligation is not the only factor you should consider when selecting investment services. Securities brokers play a valuable role as intermediaries for the sale and distribution of financial products. It’s important that you know whether or not your service provider is a fiduciary, and that you factor this into your evaluation of the services you receive.

Do you know if your investment service provider is a fiduciary? Tell us what you think.

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