Fiduciary basically means “trust”, and specifically the trusting relationship between a trustee and beneficiary. The fiduciary definition and concept is vital in the investing world where trust and the ethical management of relationships is very important. Often, people have a “fiduciary duty” to look out for the interests of various parties and people.
For example, someone who is managing over a family trust for children has a fiduciary duty to the family and children. This someone has to look out for the best interests of the family. This person must make ethical and financial decisions with their interests in mind. The interests of the person managing the trust don’t really come into play.
Perhaps an even better example, at least for investors, is the fiduciary duty of a company’s board of directors. While the CEO and upper management of a company handle most of the day-to-day operations of a company, “ultimate power” lies with the board. This board can fire the chief executive officer and others if necessary.
This board, in turn, has a (fiduciary) duty to the company’s investors. Generally, this means that companies must pursue maximum profits (without breaking laws and regulations). Although it should be noted that directors and upper level managers can set other goals besides maximizing profits. For example, setting up and pursuing limited charitable projects is generally considered okay.
Indeed, a company’s board of directors is essential precisely to ensure that fiduciary responsibilities are being dispensed. When people say that the board works for investors, not the company itself, they aren’t exaggerating. Boards of directors must always keep their investors in mind and pursue their interests above all else.
The board must always act in good faith and consider all options and avenues in front of them. If some people are making acquisition offers, for example, the board must generally set aside its own personal feelings. Instead the board must consider whether or not the acquisition would benefit investors. Board members must thus set aside any personal relationships or self interest.
Why Fiduciary Responsibility Is Needed
Fiduciary responsibility is very important for any and all matters involving money being managed by outside parties. For example, if you invest in a mutual fund, you want to be reassured that the mutual fund manager is investing in assets to maximize your wealth. You wouldn’t want this fund manager to be buying himself a boat, or investing in his friend’s startup, or whatever. (Unless said investments would increase your wealth.)
This doesn’t mean that the trustee can’t profit from the relationship. However, the trustee must outline in general, at the beginning of the fiduciary relationship, any rights and profits it will secure. If they are going to pay a person for managing over assets, they should determine this payment upfront and in a transparent manner.
The DOL fiduciary rule
The DOL fiduciary rule outlines the responsibility of employers and advisors providing investment advice and management services to employees and their retirement plans. The so-called Employee Retirement Income Security Act or ERISA outlines the rules and regulations concerning employee retirement plans, which are provided with numerous tax benefits.
At the same time, conflicts of interest can quickly arise. For example, a company might try to force employees to invest only in the company, or to invest in other things that may not be in the employee’s interest. ERISA makes it more difficult for companies to abuse and exploit this relationship.
More or less, the DOL fiduciary rules mean that anyone or any company that provides advice and wealth management services must put the interests of the employees first. Without these rules, employees might be subject to exploitation and bad investment advice and practices.
Authorities have first enacted the act back in 1974. Starting in 2009 the DOL and other officials began a process of reviewing and studying the fiduciary laws. This is to make sure that employees are able to get adequate protection, and that they were able to maximize their investment results. Officials held hundreds of meetings with various stakeholders, and conducted numerous studies and research efforts.
Now, the DOL has been implementing new rules and exemptions. Officials have changed some rules and exemptions. The new rules also mean that everyone providing advice to employees must act in a fiduciary manner. Previously, there were some loopholes, but officials have largely closed many of those loopholes.