What is a fiduciary relationship and why is it important to investors?
When it comes to financial concepts such as the fiduciary relationship, “The more you know,” the title of NBC’s Emmy Award-winning series of public service announcements, could very well be the mantra of the nation’s Affluent. Wealth and financial literacy seem to go hand-in-hand, according to ongoing research conducted by Spectrem’s Millionaire Corner.
When asked if they knew what a fiduciary relationship is, Main Street investors with a net worth between $100,000 and $1 million (not including primary residence) were significantly less likely than their wealthier counterparts to respond in the affirmative, 57 percent vs. 78 percent of Millionaires and 90 percent of Ultra High Net Worth investors with a net worth between $5 million and $24.9 million.
In the case of Main Street and Millionaire investors, self-reporting an understanding of what a fiduciary relationship is increased with age and wealth level.
What is a fiduciary relationship and why is it important to investors? Investopedia defines fiduciary as “a person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit… The person who looks after the assets on the other's behalf is expected to act in the best interests of the person whose assets they are in charge of. This is known as "fiduciary duty.
The casual retail investor may take it on faith that their financial advisor or financial services provider would be working in their best interests. Technically, though, this fiduciary standard only applies to financial advisors. Broker-dealers are not bound by federal law to a fiduciary duty, but are required to give “suitable” investment advice and to disclose any conflicts of interest to a client.
While the wealthiest investors are more confident in their knowledge of what a fiduciary is, across all wealth levels there seems to be a general understanding of the components of a fiduciary relationship. The highest percent of Main Street, Millionaire and Ultra High Net Worth investors said it involves “a relationship involving the care of assets.” The second highest percentage said it is a legal or ethical relationship. A majority also consider a fiduciary relationship to be one based on “confidence, good faith and trust.”
When asked if they feel they have a strong fiduciary relationship with their financial advisor, Main Street and Millionaire investors were most likely to agree (46 percent). Ultra High Net Worth investors more strongly agreed (43 percent
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.