You must be your own fiduciary

Many financial planners today likely claim they are a fiduciary - even signing forms and putting it in writing to demonstrate that commitment to you. As a fiduciary, they are obligated to put your interest above their own, not accepting commission or fee based on their recommended investment(s). And, of course, that’s a good thing. However, one reason they do this is that they are attempting to comply with the U.S. Department of Labor's “Retirement Security Rule,” signed by President Biden on October 31, 2023. The rule, supported by consumer protection advocates, expands the situations in which a financial services provider is considered to be providing investment advice for retirement, and thus should be subject to a fiduciary standard for that advice. Of course, the industry has pushed back, and today, two years later, the rule is on hold pending a lawsuit against the Department of Labor. Given the current administration, it’s unlikely to be in effect any time soon. So, while you’re encouraged only to hire advisors who commit to being a fiduciary, they’re not obligated to do so at this time.

But many who hire an advisor don’t realize the limitations of this fiduciary commitment. Besides the grey areas that some financial planners will skirt around (from revenue-sharing “kickbacks” from mutual fund providers to the affiliated insurance agent just down the hall), their fiduciary scope is limited to the scope of your relationship with them. For example, what investments are appropriate at your age and in your best interest? If you’re 50 and saving for retirement at 65, they’ll recommend a specific mix of investments after discussing goals and needs. While a 20% allocation in an intermediate bond fund might be appropriate, they might gloss over the fact that there are dozens of these funds with a range of expense ratios and performance. However, if they choose one of the three that the firm uses (which meets the appropriate and not compensated rule), are you sure the expenses and performance are reasonable for this specific fund? Only you can decide if the advice and actions taken on your behalf are not only appropriate and in your best interest but also have reasonable fees or expenses.

Then, there are all the other financial decisions you confront that your advisor may not know about or weigh in on. Take a car purchase. Spend $38K or $58K? A 4-year vs. 7-year loan? These other decisions can have huge financial impacts and are made without input from your advisor. The advisor is hired for specific tasks, such as retirement planning, college savings, or long-term care, rather than how you manage your money on a daily basis.

So, if you hire a financial advisor, while you want them to be a fiduciary, you ultimately have to be the fiduciary of your entire financial life. Always ask yourself, is this appropriate spending right now? Are the fees and expenses on this investment or that loan reasonable? Only you can do that. Unfortunately, some people put too much faith in a paid advisor to keep them on the correct financial path without realizing the limitations of the relationship.