Fiduciary Investing

There are two parts to fiduciary investing: One part involves differentiating whether an advisor is operating under a common suitability standard vs. a higher fiduciary standard. This difference potentially affects all investors.  The other part has to do with how to invest and strategically manage finances when a client is a fiduciary. We serve clients under both parts of fiduciary investing.

Part I: Fiduciary Standard

Many investors do not realize that advisors operate under two fundamentally different standards of advice. The more basic standard, which advisors of large firms and insurance agents typically fall under, is called suitability. Under this standard, an advisor is expected to recommend something suitable, given the facts and circumstances of a client. However, such an advisor can also take into consideration his own compensation when making such recommendations. For example, a suitability advisor might recommend a high commission annuity over a lower cost alternative. In contrast, a fiduciary standard is required of certain agents, such as trustees and independent registered investment advisors. Omega Financial Group is an independent registered investment advisor. Recognizing the value of the fiduciary standard for investors, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 called for improving suitability standards for investors. Indeed, the Council of Economic Advisers (2015) estimated investors lose some $17 billion per year on IRA accounts alone, due to being served under suitability standards. In addition, investors lose out on about 1% of return per return per year from this inferior standard. The best way to understand which standard one is being served by is to simply ask your advisor to put in writing that they are acting under the higher fiduciary standard.

Part II: Financial Management for Fiduciaries

Many individuals find themselves at some point acting as a fiduciary. For example, serving as a trustee on a personal trust, on an endowment board, or on a foundation are all examples where one can fall under the high standard of fiduciary duty. When this happens, it is essential for them to follow best-practices in carrying out these duties. For example, crafting a custom investment policy statement and cash flow management plan are important duties in these roles. The good news is, if a fiduciary hires an advisor acting under the fiduciary standard, the advisor can help shoulder some of this fiduciary duty. We at Omega Financial Group work with fiduciaries, as fiduciaries, to help them successfully fulfill their roles. We have also helped other professionals to do so: we have taught multiple continuing education workshops for attorneys and CPAs in fiduciary financial management.