De-Mystifying the Fiduciary Standard

Photo by Catie Viox



[fi-doo-shee-er-ee, -dyoo-]

noun, plural fiduciaries.

1. Law. a person to whom property or power is entrusted for the benefit of another.


2. Law. of or relating to the relation between a fiduciary and his or her principal: a fiduciary capacity; a fiduciary duty.

3. of, based on, or in the nature of trust and confidence, as in public affairs: a fiduciary obligation of government employees.

4. depending on public confidence for value or currency, as fiat money.


An odd sounding word to describe something to do with money. In fact, as the definition of the word illustrates, “fiduciary” is at its core, a word with the concept of trust, confidence, obligation, law and benefit attached to it. If you’ve been watching TV or reading online reports, there’s been a lot of discussion about a concept involving the word “fiduciary” in recent months, and more correctly, the “Fiduciary Standard.” Many political pundits have compared the Fiduciary Standard to a “Suitability Standard,” which has caused confusion in the minds of many, as well as causing some to ask the question of, “Why do I care about any of this?” Stepping back for a moment, and remembering the description of the word, “fiduciary,” the fiduciary standard refers to a section of a law titled, “The Investment Advisors Act of 1940.” This standard requires all financial advisors to act only in the best interests of their clients when suggesting financial advice. It’s an important standard and one that all registered investment advisors must adhere to or face punishment by the Securities and Exchange Commission (SEC), the governing body regulating investment advisors. But again, this begs the question of, “Why do I care?”

As all of this clearly is related to having a financial advisor, many folks will also ask the question: “Why do I need an advisor?”

It’s a good question, to be sure. Contrary to many beliefs, you do not need to be ultra-wealthy to work with a financial advisor. In fact, it really is a good idea for most people to meet regularly with financial planning professionals to help you develop a financial roadmap to guide you towards your retirement years. And it’s never too soon to do this. We believe people should know their expertise and bring in trusted advisors/experts where needed. The financial world is complex and getting more so every day with continued market globalization and pending tax and estate tax law changes. We suggest finding the right advisor to be your financial quarterback and protect your family’s future.

Much as John D. Dovich & Associates, LLC serves as trusted financial counsel for our clients, Matthew A. Swendiman, CFA and the team at Graydon Compliance Solutions, LLC (GCS) serves as an outsourced compliance provider for us. GCS advises clients on their compliance and other obligations under the federal securities laws, particularly the Investment Advisers Act of 1940. Basically, we took our own advice and hired an expert and trusted advisor. We have asked Swendiman to give us his views on several questions regarding the fiduciary standard.


Dean Johns: Matt, thanks for sharing your thoughts with our clients and the people reading this article. What does the fiduciary standard mean to you?

Matthew Swendiman: Dean, thanks for asking me to join you. The fiduciary standard that has applied to the registered investment adviser community for years is different from the “suitability” standard that has previously applied to broker-dealers. Suitable investments selected by brokers do not need to have the client’s best interest in mind. So, as long as the investment was acceptable, or suitable, the broker met his or her regulatory burden. Alternatively, registered investment advisers who adhere to the fiduciary standard must put their clients’ needs first, and have a duty of care and loyalty to their clients.


Dean Johns: So brokers aren’t acting in their clients’ best interest?

Matthew Swendiman: Many do. However, until brokers are required to meet the fiduciary standard, their burden is simply not as high as that of a registered investment advisor.


Dean Johns: Well, how do clients who receive fiduciary advice benefit?

Matthew Swendiman: Fiduciaries are required to disclose and mitigate any conflicts of interests they may have. For example, a broker may be able to invest a client’s money in a stock that is also underwritten by their firm. In this example, the broker-dealer receives compensation from both the stock issuer and the client. With this type of conflict, it is difficult for investors to know if they are receiving the best advice.


Dean Johns: Does the fiduciary standard increase transparency? What about costs?

Matthew Swendiman: Because brokers may make suitable investments for their clients, they may not fully search for higher-performing, lower-risk options. The duty of loyalty inherent with the fiduciary standard requires registered investment advisers to reduce conflicts, as well as costs. For example, when considering rulemaking to address the differences between the fiduciary and suitability standards, the White House Council of Economic Advisers found that conflicts of interest lead, on average, to $17 billion in losses, every year, for American investors.


Dean Johns: What is the government doing to address the differences between the fiduciary standard and the suitability standard?

Matthew Swendiman: Many readers probably remember in April 2016 the Department of Labor (DOL) adopted rules intended to help retirement savers obtain investment advice in their best interest. Collectively the rules have been known as the “Fiduciary Rule.” The DOL and the Obama Administration believed the Fiduciary Rule would help investors better prepare for retirement.


Dean Johns: Do the rules only affect retirement plans?

Matthew Swendiman: As proposed, the rules would affect 401k, IRA and other retirement plans, such as pensions. Taxable brokerage accounts would not be affected.


Dean Johns: Does this mean investors outside of retirement plans would still not have access to the fiduciary standard?

Matthew Swendiman: No, anyone who invests with a registered investment advisor, rather for retirement or taxable money, is served by a fiduciary. One weakness of the proposed rules is that brokers could still manage taxable assets under the suitability standard.


Dean Johns: Let’s talk about what affect the election of President Trump had on the proposed rule and what does the U.S. Securities and Exchange Commission (SEC) think about the DOL rule?

Matthew Swendiman: In February 2017, President Trump directed the DOL to produce an updated economic and legal analysis about the likely impact of the Fiduciary Rule. As part of this review, the DOL has delayed the applicability of some of the Fiduciary Rule until 2018. Further, industry groups have expressed their hope that the Trump Administration will use this time to pursue one rule that would be consistent across the retail and retirement marketplaces, coordinating with the SEC.


Dean Johns: Matt, thanks again for your time. So, to answer our initial question: investors should want to have a fiduciary standard so the advice they are receiving is in their best interests, and not solely the best interest of their broker or advisor. Hopefully, we will see a single fiduciary standard in the not-too-distant future that matches the need to protect investors without overburdening small businesses like our own.

Matthew Swendiman: Agreed – thanks, Dean.


John D. Dovich & Associates, LLC is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit John D. Dovich & Associates is a Federally Registered Investment Adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information within this material is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.