Do You Know the Origins of a Fiduciary?

In today’s financial services industry the terminology is becoming ever more confusing.

Advisor, Broker, CFA, CFP, AAIM, CIMA, and don’t forget the VHS, BETA and DVD (ha, the last 3 were to see if you were paying attention.)

Now they throw in the word Fiduciary. I did some research and the word Fiduciary comes from an interesting place…….

Let’s go back in time. The fiduciary standard has its origins in the Middle Ages. When a knight would go off to war, he would transfer legal ownership of his property to a trusted friend. During the knight’s absence, the friend had legal ownership of the property, but beneficial ownership still belonged to the absent knight. The friend served as a fiduciary and was responsible for protecting the estate and acting in the knight’s best interest, knowing that the legal ownership would revert to the knight upon his return.

Fiduciary- Person given the power to act on behalf of another and put their interests first.

The Investment Advisors Act of 1940 is a law that was enacted in order to regulate advisors who, for compensation, give advice to others as to the value of securities or as to the advisability of investing in, purchasing or selling securities. The law establishes principles for how advisers should treat their clients, which courts have interpreted to be fiduciary obligations. The adviser, as a fiduciary, owes the client a duty of loyalty, which means they must act in the best interest of the client. If a conflict of interest exists, the adviser must make full and fair disclosure of all material facts so the client can make an informed decision whether to proceed with a transaction. Additionally, the adviser owes the client a duty of care, which means the adviser’s advice, based on a reasonable inquiry of the client’s financial situation, investment experience, and investment objectives, is in the client’s best interest.

In other words, according to the SEC rules and the Investment Adviser’s Act of 1940, the 5 responsibilities of a fiduciary are:

Put clients’ interest first.
Act with the utmost good faith
Provide full and fair disclosure of all material facts
Do not mislead clients.
Expose all conflicts of interest.

The Department of Labor, not the SEC or FINRA, has broadly redefined financial advice to include investments and insurance recommendations, for compensation, to plans, participants and IRA owners.

The blog Common Financial Sense was designed to help individual investors be a little more informed. I hope we did just that.

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Until Next Time,

Scott Krase, Wealth Manager, Blogger, info@commonfinancialsense.com