Fiduciary Excellence: Enhancing Trust and Integrity in 2024

The Institute for the Fiduciary Standard’s ‘Fiduciary September’ has returned! This annual event aims at promoting the fiduciary standard and discussing the essential responsibilities that a fiduciary must uphold. As Sanderson Wealth Management has always acted in a Fiduciary capacity to all of our clients, this month is great opportunity to clarify what the fiduciary standard entails and the duties that a fiduciary must uphold, compared to non-fiduciary advisors.

The Fiduciary Standard

The fiduciary standard attempts to ensure advisors prioritize their clients’ interests over their own. This principle was formalized with the Investment Advisers Act of 1940, mandating registered investment advisors to follow fiduciary duties. The standard has been further strengthened by various laws and regulations, such as the Employee Retirement Income Security Act (ERISA) and the Uniform Prudent Investor Act (UPIA), among others. 

Of the financial advisors practicing across the United States, a notably low percentage act as true fiduciaries. Only ~11% of advisors practice under the fiduciary only rule and the remainder are split between brokers or dually registered advisors. These ~89% of advisors practicing outside of true fiduciary standards can switch between appearing to act in the client’s best interests while selling products for a commission to increase their own financial gain.

Fiduciary Standard Principles

The Committee for the Fiduciary Standard highlights five key principles, written to protect the interests of those seeking advice:

Adhering to fiduciary standards is crucial for maintaining trust and integrity in client relationships. It ensures that fiduciaries are held accountable for their actions and decisions, fostering a culture of honesty and ethical behavior. For clients, knowing that their fiduciary is legally and ethically bound to act in their best interests provides peace of mind and confidence in the management of their assets. Overall, fiduciary standards play a vital role in protecting clients and upholding the credibility and reliability of fiduciary services.

Fiduciary Standard vs. Suitability Standard

Financial advisors often follow two standards: the Fiduciary Standard and the Suitability Standard. These standards differ significantly in terms of client interest.

Under the Fiduciary Standard, advisors have a legal obligation to prioritize their clients’ interests over their own. They must disclose any conflicts of interest related to products and provide transparency regarding their compensation. 

Conversely, the Suitability Standard only requires advisors to make recommendations they believe are acceptable for the client. They are not obligated to disclose conflicts of interest, such as commissions or incentives for recommending certain products. Advisors operating under the suitability standard may not present a more advantageous alternative option to a client for personal financial gain, so long as the solution is deemed suitable.

New Fiduciary Ruling

The financial planning industry is continually raising its standards as the demand for advisors who prioritize their clients’ best interests grows. Barring any changes, on September 23, 2024, a new ruling will mandate that advisors who handle retirement savings follow the fiduciary standard. The Department of Labor issued the “Retirement Security Rule” to revise the criteria for who is considered a fiduciary under the Employee Retirement Income Security Act (ERISA). The increase to fiduciary requirements offers more security and clarity for families who seek professional guidance.

This rule came after growing concerns about conflicts of interest in which financial advisors had been prioritizing their own interests and financial gain above the best interest of the client. Previous implementation attempts faced legal challenges and pushback from large groups in the industry. The new ruling hopes to provide clearer guidelines for the fiduciary’s responsibilities.

As SWM has already been acting in a fiduciary capacity, this new ruling does not alter our current practices or standards for our relationships.

Having a financial advisor who operates strictly under the fiduciary standard ensures that your family’s financial interests are always put first. Fiduciary advisors offer a high level of commitment and transparency, giving you and your family peace of mind and confidence in their financial recommendations.