The Department of Labor released a final version of its fiduciary rule for retirement advisors last month. This would affect the roughly $1 trillion in assets that’s rolled over from 401(k) and other retirement plans to IRAs every year, and would take effect in September, unless it is delayed by court action.
Financial advisors generally have a client’s best interest at heart, because just as with any other business their client’s success leads to a greater success for them. This ruling has to do with whether or not retirement advisors would be able to continue to provide recommendations that are “suitable” for the client, or need to provide recommendations that are in the client’s best interest and put the client’s interest ahead of their own.
This seemingly minor difference between “suitable” and “best interest” is significant to regulators.
Investment doesn’t come without risk, and in order to provide suitable recommendations brokers or advisors needs to fulfill three criteria. They need to have a reasonable basis to believe the investment will be suitable for at least some investors. They need to have a reasonable basis that it suits the customer it’s being recommended to, based on their age, risk tolerance, and investment time horizon. They even need to have a reasonable basis that the recommended transactions are not excessive.
The “suitability” standard helps prevent churning of accounts and recommendations that make no sense for the client, but falls short of the higher requirement that the client’s interest be placed first. Nobody is trying to gamble with the nest egg that is America’s retirement savings, but it isn’t surprising that the Department of Labor may want to make sure that those giving recommendations about it are held to the highest fiduciary standard. That way the recommendations must take the fees paid to the advisor into account as well, and have a higher standard regarding potential conflicts of interest and ensuring the client’s interest is put first.
Garden State Trust Company acts not only as a fiduciary, but also as a trustee, which means that in order to fulfill our duty of loyalty to our clients, we have many other specific duties we are legally obligated to perform on behalf of our clients.
Here are some of the more common duties a trustee owes its beneficiaries:
- Duty to administer a trust by its terms. Every trust agreement should make plain the purposes of the trust, as they provide the critical benchmarks for evaluating the trustee’s actions.
- Duty of skill and care. A high standard of performance is required, even if an amateur is named who has no prior experience as a trustee.
- Duty to give notices. Notices may concern legal rights of the trust beneficiaries, such as a power to make withdrawals, or they may cover such ministerial matters as designating a successor trustee or an agent to assist in trust administration.
- Duty to account. A written accounting of the assets, liabilities, receipts and disbursements of the trust must be provided to the beneficiaries regularly.
- Duty of impartiality. The trustee must not favor one beneficiary over another, unless the trust document directs that providing for a particular beneficiary is a principal purpose of the trust.
- Duty to invest. Trust assets must not be left idle. In addition to making the trust investments, the trustee has a duty to diversify the investments and develop an asset allocation plan. This is a job for professional investors or corporate fiduciaries.
- Duty of confidentiality. Normally, the terms of a trust, the identity of its beneficiaries and their respective interests, and the nature of the trust assets cannot be disclosed to anyone except the beneficiaries and those who need such information in order to be able to administer the trust.
The word “fiduciary” may be legal jargon; however, we take pride as a trustee in our duty of loyalty to our clients and being legally bound by it. We’ve heard it said that once you’ve heard of the fiduciary standard, you would never settle for anything less.
Interested in learning more of the duties of a trustee; or the difference between Garden State Trust Company’s financial services and ordinary investment accounts?
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