What is a Fiduciary? And When Do You Need One?

What is a Fiduciary and Why Should You Care?

May 8, 2018

By Michelle Holmes • Trust Investment Officer

You hear a lot about fiduciary duty in news headlines, but most people are unsure of what a fiduciary is. Investopedia defines a fiduciary as “...a person or organization that owes to another the duties of good faith and trust. The highest legal duty of one party to another, it also involves being bound ethically to act in the other’s best interests. A fiduciary might be responsible for general well-being but often involves finances – managing the assets of another person, or of a group of people, for example. Money managers, bankers, accountants, executors, board members and corporate officers can all be considered fiduciaries.”

An example of fiduciary duty: A fiduciary cannot purchase or sell securities for their own account before they buy or sell for their client’s accounts.

Although financial advisors can be fiduciaries, not all act as fiduciaries. Brokers and insurance agents are examples of advisors that can receive commissions and may not be a fiduciary. Financial advisors that are not fiduciaries have to abide by a suitability standard. How is this different from being a fiduciary? Following a suitability standard requires that the advice given fits or is suitable for the client’s current financial situation. The advisor is not legally bound to put the client’s best interests first like a fiduciary.   

The Department of Labor (DOL) issued the Fiduciary Rule in 2016 requiring all financial advisors managing retirement plans including 401(k)s and IRAs to act as a fiduciary. The full implementation of the rule is set to take place in July of 2019. This is changing how brokers and insurance agents work with retirement accounts. The fiduciary rule prohibits transactions where the advisor receives a higher fee or commission, which is typically the way brokers and insurance agents are paid. Under the DOL fiduciary rule, all financial advisors will have to switch to fee based compensation or provide clients with a Best Interest Contract Exemption (BICE) disclosure agreement. This agreement states the advisor is working in the best interest of the client and must spell out all compensation received by the advisor.

Do you need a fiduciary to invest? Not necessarily. It depends on the level of investment knowledge, the needs, and desires of the investor. Some investors need little guidance and simply want a way to transact their investments. Others want the security of knowing someone is looking out for their best interest and/or need more advice. These investors may be better suited with a financial advisor that is a fiduciary. If you are not sure if your financial advisor is acting in a fiduciary capacity, ask them.

To offer trust and fiduciary services, a bank must apply for and receive a separate trust charter. This charter or authorization can come from a state or from the U.S. Government. From 1948 when Security National Bank received its federal charter to provide fiduciary services, we have offered this additional level of service. To offer this service, Security National is required to adhere to a strict separate series of rules and regulations governing fiduciary activities and is regularly examined by the Office of the Comptroller of the Currency (OCC). While other financial service providers are just now being required to adopt formal fiduciary standards, for Security National, these standards have defined us and describe who we are.

Whether you need a fiduciary or not, Security National Bank can help you invest. The Wealth Management Division at Security offers a full array of investment services and acts as a fiduciary for clients. The bank also has a full service brokerage team that can transact on a commission or fee based arrangement depending on your needs. Contact an advisortoday!

About the Author

Michelle Holmes, CFA

Michelle Holmes is an Assistant Vice President in Investments with Security National Bank's Wealth Management Division. A Chartered Financial Analyst® charterholder, Michelle has two decades of investment experience. She graduated from Morningside College with a Bachelor of Science in accounting, business administration and economics.