5/1/13 10:13 AM – Fiduciary, a Term You Need to Know

Fiduciary – In law, a person in a position of authority whom the law obligates to act solely on behalf of the person he or she represents and in good faith. – The Concise Dictionary

Why is this important? Because, the legal obligation to act solely in the best interest of the client affords strong legal protection to the client. Most stockbrokers and bank investment salespeople operate only on the far lower standard that investments must simply be suitable for the client.

Several products may be suitable for you but they may vary widely in how much commission is paid to the broker. Let me give you a very common example.

If a broker sells you a mutual fund’s class B shares, you will typically pay an extra 1% per year in fund expenses plus you will nearly always face surrender charges of several percent should you want to sell the investment. Typically surrender charges last 4 or 5 years. The broker gets a 4% sales commission.

On the other hand, if he had sold you a similar closed end fund or ETF, or better yet, a no-load mutual fund, your annual expenses would be much lower and you would have no surrender charges other than the selling commission. But the broker’s commission often is only 1% vs. the 4% he got on the B shares fund. Which choice do you think most brokers make? Both are suitable, but the no-load fund or ETF may be much more in your best interest.

All registered investment advisers are fiduciaries. I have gone a big step further by becoming an Accredited Investment Fiduciary (AIF), which has important implications for how I work with clients. The standards for practice set by fi360, the organization that grants the AIF designation, are rigorous and sound, setting me apart from most investment advisers, even those that are fiduciaries.

You need to ask your current investment adviser if they are willing to put IN WRITING that they are an investment fiduciary on your accounts. Some will, but the majority will not, usually claiming correctly that their legal department will not allow it.

If your adviser will not accept responsibility as a fiduciary, you should think hard about changing advisers. If you want a higher level, click on Contact Us at the top of this page, or call me at 800-566-2721.

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