Originally published in Jewish News.
You may have seen a popular commercial for a money-management firm that highlights that its financial advisors are fiduciaries and thus its clients are treated better. However, if you don’t know what the term fiduciary means you might not understand why. So, what is a fiduciary and what sets them apart from other financial advisors?
Jewish News posed these questions to local financial planning experts Frederick A. Schertenlieb, business development at Estate Management Services; Erin Itkoe, CPA, CFP, director of financial planning at Tarbox Family Office (she is also the vice-chair of the Center for Jewish Philanthropy of Greater Phoenix’s 2023 Tax and Legal Seminar to be held on Nov. 3 this year); Dan Doering, private wealth advisor at U.S. Bank; and Blake Koolick, CPA, partner at Scottsdale CPAs, PLLC.
Schertenlieb defined a fiduciary as: A person or organization who acts on behalf of another person or persons. When you are named a fiduciary and accept the role, you are legally required to manage the person’s money and property for their benefit. As a fiduciary you are required to put your client’s best interest ahead of your own. Fiduciaries are expected to exercise a duty of care and a duty of loyalty to clients and are held to the highest standard of conduct. Fiduciaries have a bond of trust with another person who is known as the principal or beneficiary.
Some financial professionals who work for brokerage firms are bound only to a suitability standard but aren’t bound to work only in the best interest of their clients. “There is often confusion about fiduciary duty and suitability,” said Itkoe. “One of my favorite sayings highlights the differences: ‘Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you, too.’ A fiduciary duty means acting in the best interest of the client, whereas a suitability standard means having a reasonable belief that the recommendation is suitable for the client.”
There are many types of fiduciaries, including those that are court-appointed to serve in the roles of personal representative, conservator or guardian. Fiduciaries can also serve under an agreement, such as trustees or as agents under a power of attorney document.
In Arizona, there are both public fiduciaries and licensed private fiduciaries. Licensed fiduciaries, whether public or private, are licensed by the Arizona Supreme Court and are regulated by the Administrative Office of the Courts. All fiduciaries, both licensed or anyone serving for a fee or not, are governed by State of Arizona law.
“Examples of fiduciary relationships are trustee and beneficiaries, personal representative and legatees, attorney and clients, board of directors and shareholders, guardians and wards, doctor and patients and real estate agent and buyer or seller,” said Schertenlieb.
Liabilities for fiduciaries can arise if they breach their fiduciary duties, mismanage assets or act negligently. “They can be held accountable for financial losses suffered by clients due to their actions,” said Doering.
Some examples of breach of fiduciary duty are fraud committed by the fiduciary, embezzlement by the fiduciary and negligence.
“Many fiduciaries serving in recent years have purchased fiduciary liability insurance as no matter how carefully fiduciary duties are administered, mistakes can be made,” added Schertenlieb.
Fiduciary liability coverage includes protection against claims such as conflicts of interest, improper advice, errors or omissions, mismanagements or failure to monitor third parties.
An accusation of a breach of fiduciary duty can hurt the reputation of a professional, said Koolick. “If a breach of duty case proceeds to the courts, steeper consequences can result. A successful breach of fiduciary duty lawsuit can result in monetary penalties for direct damages, indirect damages and legal costs. A court ruling can also lead to industry discrediting, the loss of a license or removal from service,” he added.
A benefit of hiring a fiduciary is that the advisor is required to provide advice that is in their customers’ best interests, even if that necessitates suggesting a less expensive investment alternative or declining a commission.
“This can provide a higher level of trust and transparency compared to other financial planning professionals who may not have the same legal duty,” said Doering.
Itkoe added, “You always have the peace of mind that your overall financial plan and any recommendations are always based on what’s in your best interest.”
Many fiduciary advisors charge on a fee-only basis so that they earn money exclusively through the fees that their client pays for investment management services. However, possible drawbacks include higher fees due to the fiduciary’s stringent regulations they must adhere to, limited investment options, limited control and limited guarantees. JN
Jewish News is published by the Jewish Community Foundation of Greater Phoenix, a component of the Center for Jewish Philanthropy of Greater