What Every Investor Needs to Know About the Fiduciary Standard

There’s a lot of jargon in the financial service industry. And much of it probably flies right over the heads of most investors.

But if there’s one word that every investor should know and understand, it’s “fiduciary.”

The fiduciary standard is a set of regulations requiring advisors to always act in the best interest of their clients, to disclose any potential conflicts of interest, and to be transparent about how they’re being compensated. “Being a fiduciary is the highest legal duty of one party to another. It has a legal, moral and ethical component,” says John Allen, Market President of Argent Trust’s Greenville office.

At Argent, all of our trust advisors and registered investment advisors follow the fiduciary standard. But throughout the financial services industry as a whole, this standard is far from universal.

According to a 2015 report from the White House Council of Economic Advisers, Americans lose about $17 billion a year in investment returns due to advisors and brokers steering them toward securities that aren’t in their best interest and may include higher fees and lower returns than similar products.

To help understand what all of this means, let’s tackle a few big questions regarding the fiduciary standard.

Who has to follow the fiduciary standard?

To answer that question, it helps to understand the overall makeup of the financial services industry. Financial advisors are broken down into three client-facing groups: trust advisors, registered investment advisors (RIAs) and broker/dealers. Trust advisors and RIAs have been legally required to follow the fiduciary standard since 1940. Most broker/dealers are currently exempted from the requirement, though some voluntarily choose to follow it.

At Argent, providing this level of service is baked into our company culture.

“We’ve worked under the investment fiduciary standard for decades,” says Timothy Barrett, Senior Vice President and Wealth Advisor in Argent Trust’s Louisville office. “Our attitude is different. We don’t sell on performance. With many stockbrokers, they’re constantly trying to beat benchmarks, sometimes at the expense of long-term goals. We sell on services and on our fiduciary responsibilities. We take good care of our client’s money and do what’s in the best interest of families.”

What happened with the proposed changes to the fiduciary rule?

Proposed regulatory changes to the fiduciary standard were first put forth by the Department of Labor (DOL) during the Obama administration. The new rules – commonly referred to as the “fiduciary rule” – would have expanded the definition of a fiduciary to include any professional providing retirement planning advice or working with retirement plans, including brokers, financial planners or insurance agents.

The proposed changes, however, effectively died on the vine on June 21, 2018. That’s when the 5th Circuit Court of Appeals, which covers Texas, Louisiana and Mississippi (all states served by Argent), confirmed an earlier March 15 ruling that it would not enforce the new fiduciary standard, noting the DOL had overreached its authority.

The court’s ruling ended efforts to increase the number financial professionals who would have been held to the fiduciary standard. Nonetheless, the resulting debate caught the attention of mainstream media and resulted in increased awareness of the simple (but important) fact that certain financial professionals are not legally bound to work in the bests interests of their clients.

Why is the fiduciary standard important?

When you invest your money, you want to feel secure that your financial advisor is putting your needs before their own. Without the fiduciary standard, an advisor only has to make sure that an investment is suitable for their clients – even if similar ones might be a better fit. This is known as the “suitability standard.”

“It doesn’t have to be the best product or the cheapest product, it just has to be appropriate,” Allen says.

Some proprietary products have a variety of hidden fees attached to them that non-fiduciary advisors aren’t required to disclose to clients. They also aren’t required to disclose conflicts of interest, which could include receiving a bonus to promote a particular investment.

“A front-end loaded fund might pay the broker 6 percent up front, for example, with a small management fee going forward. Securities with a rear-end load would charge a fee when you get out,” Allen says.

Does that mean I shouldn’t invest with brokers?

Brokers have an important purpose in the financial services world, says Byron Moore, an Argent Advisor in Ruston, Louisiana. They’re often the only resource available to investors who don’t have a large amount of money, and because they don’t have the additional fiduciary requirements, their services tend to be less expensive as a whole.

“It’s a basic rule of economics. If you impose a higher cost, through increased regulation, on an industry, it’s going to show up somewhere. It could show up in reduced supply or trimmed back services,” Moore says. “There has always been a need for people to just execute transactions. Using a broker involves a lower cost, and if you’re capable of looking out for your own interest, that may be all you need.”

How does this affect me?

If you’re a client of Argent, any changes that would have been made would not have affected you. The debate strictly involved the world of broker/dealers. Currently, only broker/dealers who oversee retirement plans are required to follow the fiduciary standard. The Securities and Exchange Commission wants to expand that requirement to all broker/dealers, a change that could come out sometime this year.

“I think the proposed DOL regulation was well intentioned, like a lot of things, but by the time the sausage is made, it would have caused as many problems as it solved,” Moore says. “It would have helped to some degree, but a lot of it was about how things appear instead of substantively changing the playing field.”

However, any increased level of transparency is ultimately a good thing for investors, Barrett says.

“I don’t want to buy a refrigerator that’s simply marked up and could be purchased cheaper elsewhere. I don’t want that at Best Buy; why would I want that with my broker?” he says.

How can I feel secure that my advisor is looking out for my best interest?

Ask your financial advisor if they are serving you in a fiduciary capacity. If they’re not, take that fact into account as you weigh the pros and cons of investments that they suggest to you.

If you’re looking for an advisor and you don’t know where to start, your best option may be asking people you know.

“Talk to friends and neighbors you trust. Ask who they use, if they’re good, if they communicate with clients the way they want to be communicated with. I always suggest interviewing at least three candidates before deciding to work with any kind of financial advisor,” Moore says.

Ultimately, Barrett says, the reputation of an advisor or a company carries as much value as any legal standard.

“From a purely competitive side, the reputation of being ethically minded is what keeps you in business,” he says.


Argent Financial Group

Celebrating its 30th anniversary in 2020, Argent Financial Group (Argent) is a leading, independent, fiduciary wealth management firm. Responsible for more than $30 billion in client assets, Argent provides individuals, families, businesses and institutions with a broad range of wealth management services, including trust and estate administration, investment management, ESOPs, retirement plan consulting, funeral and cemetery trusts, charitable organization administration, oil and gas (mineral) management and other unique financial services. Headquartered in Ruston, Louisiana, Argent was formed in 1990 and traces its roots back to 1930.

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