Fiduciary Rule
Quick Definition
A legal standard requiring financial advisors to act in their clients' best interest rather than their own.
Key Takeaways
- Always ask if your financial advisor is a fiduciary — get it in writing
- Fee-only advisors are more likely to be fiduciaries than commission-based advisors
- The fiduciary standard requires best interest; the suitability standard only requires appropriateness
- RIAs are fiduciaries by law; broker-dealers are subject to Reg BI (a lower standard)
What Is Fiduciary Rule?
The fiduciary rule establishes a legal and ethical standard requiring financial professionals to place their clients' interests above their own when providing investment advice. Under fiduciary duty, advisors must recommend the best options for clients regardless of how it affects the advisor's compensation. This contrasts with the less stringent suitability standard, which only requires that recommendations be appropriate for the client, even if better options exist. Registered Investment Advisors (RIAs) and fee-only financial planners are held to the fiduciary standard, while broker-dealers have historically operated under the suitability standard. The SEC's Regulation Best Interest (Reg BI), implemented in 2020, raised the bar for broker-dealers but still falls short of a full fiduciary standard.
Fiduciary Rule Example
- 1A fiduciary advisor recommends a low-cost Vanguard index fund (0.03% expense ratio) over a similar fund that pays the advisor a 5% sales commission.
- 2Under the suitability standard, an advisor could recommend an annuity with high fees that is suitable but not optimal for the client.
- 3When asked about a specific stock, a fiduciary must disclose if they own shares and explain any potential conflict of interest.
Related Terms
Financial Advisor
A professional who provides guidance on financial planning, investments, tax strategies, and wealth management.
Wealth Management
A comprehensive financial advisory service combining investment management, tax planning, estate planning, and other strategies.
Fiduciary Duty
A legal obligation to act in the best interest of another party, placing their interests above one's own.
FAFSA (Free Application for Federal Student Aid)
The federal form used to determine eligibility for financial aid including grants, loans, and work-study programs.
401(k)
An employer-sponsored retirement savings plan with tax advantages, often including employer matching contributions.
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A numerical rating (typically 300-850) that represents a person's creditworthiness based on their credit history.
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