What Is a Fiduciary, Anyway?

   By Karen Manczko
   Director, Institutional Relationships
 
   May 24, 2021

Let’s be honest—all the terminology used in financial services is enough to make any investor’s head spin. Today I want to focus on one word often overheard in investment conversations, especially those driven by boards and investment committees: fiduciary.

So what exactly is a fiduciary?

• The Cornell Law Dictionary provides a somewhat vague definition of fiduciary duty as providing “the highest standard of care.”
• An online search for the phrase “become a fiduciary” yields various articles from organizations describing that investment advisers are “held to a fiduciary standard,” alongside information on “the requirements to become a fiduciary financial adviser.”

In simple terms, a fiduciary is a person or entity acting solely in the interest of others. When giving investment advice, a fiduciary must act in the best interest of its clients, putting its clients’ interests above its own and upholding the duties of care, loyalty, and good faith.

In considering the importance of engaging a fiduciary, the investor will no doubt reflect on the following questions: Are there a set of “fiduciary guidelines” that outline a minimum level of required support? How can I be sure that my investment adviser is providing the highest standard of care? What about conflicts of interest?

When engaging the services of an investment adviser, I believe it is absolutely essential that an investor fully understands that the investment adviser must function as a fiduciary. Further, an investor should secure an understanding of any conflicts of interest and fees and expenses related to the investment adviser’s services. Doing so will help ensure that the investment adviser places the investor’s interests over its own financial incentives.

Fortunately, if an investor wants to fully understand its potential investment adviser’s fiduciary commitment, all the investor needs to do is ask! Below we’ve noted several of the questions that investors routinely ask Wespath.

1. Will your organization – and the individuals assigned to manage and service the account – commit in writing to serve in a fiduciary role in providing investment management services to our organization?
2. Does your firm receive any form of compensation from working with this account beyond what you have revealed? If yes, what is the form of this compensation?
3. Describe any potential conflicts of interest your firm may have in the management of our portfolio including the extent to which you are using proprietary portfolios for which your organization directly selects, and executes transactions related to the underlying securities?
4. Are any of your staff incentivized based on particular investment options they include in the management of our portfolio?
5. Does the individual servicing our account generate revenue or seek to generate revenue from any service other than investment management?