What Is a Fiduciary?

What is a fiduciary? This is a question that Richard Oring is frequently asked by his clients at New Century Financial Group.   When looking for an advisor, it's an important question to ask.

A fiduciary is an individual or organization legally required to manage a person's assets for that person's benefit, not their own.   Being a fiduciary means a financial advisor is held to a higher standard when making decisions for his or her clients.

Fiduciaries must follow "duty of care" and "duty of loyalty" - Rich explains what these terms mean and entail.

It's also important to understand how your financial advisor is compensated - are the commission only, fee only, or fee-based (a combination of the two)?

The important thing to remember when looking for a financial advisor is to ask questions.  This can be a confusing field, but your future is too important to simply make assumptions.  And a good financial advisor will make sure your questions are answered.

You can always reach out to Richard Oring and his team at New Century Financial Group.  You can schedule an appointment from their website: https://ncfg.com/

Or you can reach out directly to Rich:  roring@ncfg.com
Or call him at  (609) 924-2049, extension 126.

Transcript

Jag:

Welcome to Financial Matters with Richard Oring. I am Jon "Jag" Gay. Richard Oring from New Century Financial Group joins me as always. Hey, Rich.

Rich:

Hey, Jag. How you doing?

Jag:

Good. And as we get into the beginning of the year here, I think some folks kind of take stock of their financial situation, maybe even their financial advisor. And one of the really big questions and buzzwords in the industry the last couple years has been around fiduciary. So today, we're going to talk about what a fiduciary is and what that means. So let me start off by asking you, from the get-go, what is a fiduciary?

Rich:

Jag, you kind of said it in your introduction about what a fiduciary is, teeing me up. It's interesting. I don't think I've ever been asked so many times now, if I'm acting as a fiduciary. So what that's showing me is all this education, which is being pushed out there to educate investors, is working. They're beginning to ask the right questions, and that's great. I really love when someone asks me if I'm acting as a fiduciary, because they should.

Jag:

Okay. With that in mind, what is a fiduciary?

Rich:

Let's keep it simple. A fiduciary is an individual or an organization which is legally required to manage or purchase assets for their benefit, not their own. So you have to manage assets for the client's benefit, not your own.

Jag:

I think that is really important, as you just alluded to, Rich, because there are financial advisors out there. And there's a million different terms for a million different things that are done in your industry. But there are some financial advisors that, let's be honest, they're more kind of like salespeople. They've got their commissions based on what they're selling, and they might be making recommendations based on what's going to help them out on the back end, as opposed to what might be ideal for the client they're talking to. And that's the difference, because a fiduciary is legally obligated to put their client's best interest first, ahead of their own.

Rich:

I want to add something. What you said is correct, but not everyone. There are people who are acting as an advisor, who's not a fiduciary. That doesn't mean they're not doing what's best for their client. It just means that they're not acting as a fiduciary under the same legal requirements. There's still always a requirement for suitability, so they have to follow that suitability standard, which means they have to understand the client's risk, their goals, the time period, and et cetera, to make that sale. The biggest difference is, if they're selling something for a commission, it may not be the best product. It has to be suitable, may not be the cheapest product, but it has to be suitable and meet those suitability requirements.

Jag:

Okay, so let me back up there, because I don't want to paint a non-fiduciaries too broad of a brush there. I'm glad you made that point, Rich. What you're saying basically is, even if you're not a fiduciary, you still might be a good suitable fit for a client and meet that standard. But the difference is, if I'm understanding this correctly, is there's the suitability standard for everyone, but the fiduciary standard is a higher bar to clear if you want to have that designation. Do I have that right?

Rich:

That's correct. And legally bounded to follow that requirement.

Jag:

And I got to imagine that also plays into any potential conflicts with products or services offered to the client as well, right?

Rich:

Well, that's a great thing. So part of the responsibilities of a fiduciary is to avoid conflicts. If there's a conflict you can't avoid, you have to disclose it to the client at the time of recommendation, not after you made the sale, but at the time of recommendation or sooner, if there's any conflicts.

Jag:

That makes sense.

Rich:

So Jag, you might say, "What kind of conflicts?" There could be a lot of conflicts, so as an investment advisor, if I'm acting as a fiduciary and I'm going to earn a commission, I kind of have a conflict there. I have to let you know. If I get marketing support from a vendor, I should let you know. There's a personal interest of doing business with them knowing that they might be supporting some of my events. So those are conflicts I should be disclosing. So better question is, who are fiduciaries? We throw that term out there so loosely, and yes, people who are managing investments can be fiduciaries. And that's what we're going to focus on mainly. But let's not forget, if you're a trustee for maybe a [inaudible 00:04:09], special needs trust or whatever, or any kind of trust, you're acting as a fiduciary. As a trustee, you are a fiduciary.

Again, you're managing someone else's money or assets for their benefit, not yours. An estate executor, same thing. You're representing the person who passed away, but you're also representing the other beneficiaries. A lawyer could be acting as a fiduciary, representing a client. How about a director of a corporation? They're representing thousands of shareholders at times, and they have to do what's best for what is right for the shareholders. Give you an example. Elon Musk is getting some crap right now, because of what he's doing with Twitter and affecting the Tesla stock. So the Tesla's shareholders, as you see in the news, are complaining, and Elon Musk is stepping down from Twitter and going back to focus and do what's right for the shareholders who he represents. So that's a great example right there, what's happening right now.

Jag:

Oh, absolutely.

Rich:

Real estate agents. A lot of times, a real estate agent might be acting for the buyer and the seller. That's a conflict. They're still responsible for all the disclosures, letting each party know what the commissions they're going to be earning, and so forth. So as a real estate agent, they're also a fiduciary, representing the buyer or the seller's best interest. But Jag, again, we're going to talk about the financial advisors, and there's probably two things we need to talk about. And that's the duties of a fiduciary.

Jag:

It's the first.

Rich:

Duty of a care. So if I'm going to act as a fiduciary, I can't just make recommendations. I have to ask questions. I have to understand what the client's goals are, their risk, their tolerance. I need to understand, when I make a decision, how that's going to affect their tax return, what their past history experience was with investing. Why are they coming to me? Are they coming to me because they had a bad experience or someone didn't meet their expectations? So I have a lot of things I need to take in consideration, and I have to ask questions. So that's the first thing is duty care, really understanding, when you make a decision, that it has to be based on some information, more information to make a wise decision, of course.

Jag:

And that goes to some point we've made many times previously in the podcast, Rich, and that is this whole idea of cookie cutter of, "Hey, you come into my office, I'm going to give you either plan A, B, C, D, or E." No. You need to understand what a client's goals are, what their plans are, what their hopes and dreams are, not to be hokey about it, but you need to understand what makes them tick and what motivates them. And then, you can make a better informed decision about what products or services or investments to recommend.

Rich:

As you know, I've done coaching to other advisors and supervision. The first thing I will stop immediately if I see is when somebody goes to their very initial meeting with a recommendation.

Jag:

Before they've even talked to the client?

Rich:

Yeah. Because they know what they want to sell ahead of time, because they're maybe limited on their products or stuff like that. But how do you know what they need? I don't get it. Why would you even pull prospectuses out or applications, until you really understand their needs? They may not need what you're trying to sell them. They may not even need your services at the end of the day.

Jag:

Sounds like, if you go in with a plan of action, they're not going to need your services if they're smart.

Rich:

No. So anyone listening, if you're meeting an advisor for the first time and they have what you should be buying, a recommendation, get up and leave. They didn't ask you the questions, they don't know your risks, your goals. How can they possibly give you a recommendation?

Jag:

Fair.

Rich:

So Jag, as you said, there's two. Duty of loyalty, and we kind of discussed it. We have to be loyal to our clients, and we have to disclose conflicts, issues which might affect our relationship. All right? There really shouldn't be a conflict, but if there's one you can't avoid, you need to disclose. And that's the most major thing. Sometimes, you might be acting as a fiduciary and sometimes not acting as a fiduciary. And that's very important to let your clients know what role you're acting. Give you an example. I might be doing a financial plan as a fiduciary, and my recommendation is life insurance.

And they come back to me and say, "Do you offer life insurance?" "Yes, but you're not required to buy it from me, because you're paying me to be independent for a financial plan. But if you're interested, I can price out a insurance policy and present it to you, and if you want it, you can buy it from me. But it's not in the same role as a fiduciary doing your financial plan. I just want to let you know that you can go anywhere for this, and you can get quotes. You can bring it in, and I'll still give you my recommendation." I will never, ever promote me selling a life insurance plan, when I'm doing a financial plan, if they need it. Usually, clients will ask me if I do it, and that's the speech I give them.

Jag:

Difference of separating church and state is what it sounds like there.

Rich:

Yep.

Jag:

All right. So I know there were a lot of titles in the financial services industry, Rich, and they can be confusing. Can we kind of break these down a little bit?

Rich:

Sure. These titles are so confusing. A couple years ago, the regulators came back and said, "All right, we're going to narrow down some of these titles and make some requirements to have them." So let's just talk about some basic ones. Investment advisor, wealth manager, financial advisor. Those are probably the biggest ones we see out in the industry today. But what's interesting is none of them say you're a fiduciary. You could be either one. So how do you know? You got to ask. Or go online, look at their website. There's something called an ADV. If you're acting as a fiduciary, there's certain disclosures you have to give. One of them is called an ADV. Again, research. If you see something called a register investment advisor, or RAA, they have the ability to act as a fiduciary. Again, you have to ask them though, if you hire them, "The services you're providing me, are you acting as a fiduciary or is this like a one-time commission sale, like a life insurance?" So even if you find someone, you still have to ask how they're going to be acting.

Jag:

I think asking is such an important point. I'm glad you brought that up, Rich, because I think sometimes, when we as consumers are wading into fields that we may not be an expert in, we may walk into a doctor's office and the doctor says, "Okay, this is wrong with you. Here's this prescription for this medication." You say, "Okay." And I can't tell you how many times I've heard recently or anybody on TV or a recommendation say, "Hey, if you're not sure about something, you don't understand why your doctor is doing something, ask them why they're diagnosing you with this, why they're prescribing this." I think the same applies here, because you may not know a lot about this space. If an advisor or any of these titles tells you something and you don't understand the why, that's why it is so important to ask. I'm sure, from your chair, Rich, you'd rather have me ask you something if I don't understand it than just kind of smile and nod and say, "All right, Rich, whatever you say."

Rich:

As you're saying, I'm listening to you, and I'm kind of chuckling inside, thinking of my doctor relationship with myself. And I'm pretty close with my doctor. We joke around a lot. So I'm very analytical. I do my research. If I have a pain somewhere or feel something, I do my research. I go to Google, WebMD, every single website you can.

Jag:

That's dangerous, by the way.

Rich:

I know. Then I go to the doctor, I remind him that I did get my medical degree from Google, and I start telling him about the problems. And then, I'm telling him what it is and how he should treat it, and he looks at me like I'm a complete moron. Because one, I probably have the wrong ailment diagnosed, and the organ may not even be at that place in the body. And he laughs. He makes fun of me all the time. He's like, "You know what? Can I do my job, you do your job?"

Jag:

It's like that famous episode of the Simpson, where Bart's trying to fake sick getting out of school, and he's doubled over in pain. And he goes, "Oh my ovaries."

Rich:

Nope. Hey, Jag, let's talk about how advisors get paid.

Jag:

Yes, let's change the subject from that.

Rich:

I love when clients, like you present something and they don't ask how you're getting compensated.

Jag:

It's very easy for a client, to our earlier point about asking questions, to say, "How much is this going to cost me?" But I think, in this situation, I'm glad you're going here, Rich, a better question is, "How are you being compensated?" Not "What's it going to cost me?" But asking how you are compensated is going to paint a lot clearer of a picture.

Rich:

So one of the things in our industry is a lot more disclosures on fees, because sometimes fees could be hidden in a product. Take variable annuities. You buy them. You're not having money coming out of your contribution to pay a commission. You're usually having a contract. If you surrendered within so many years, there's a backend fee, because the advisor got paid a commission. Clients don't ask, because they're not seeing it. But they are paying for it. There's costs associated in that annuity to compensate the advisor, of course. So I just mentioned a commission sale. So a lot of times, if we're selling maybe a mutual fund, directly from the fund company, or we're selling life insurance, those are commissioned products usually, and we get paid by the vendor. Sometimes in a A-share mutual fund, they'll deduct that from your purchase to pay us. Other times, it's built into the costs, and there's surrender charges.

So there are advisors who do just commission. They don't do fiduciary or advisory work, we might call it. They're just commission based. A lot of times, you see, I'm not trying to stereotype, but a lot of, when you go to a bank and they handle the smaller accounts, if you go over a certain size, then you're referred to the other person at the branch. But a lot of those people are commissioned. Only life insurance agents are usually commission only. Then you have fee only advisors. Then you have advisors who say, "Look, I want to be pure on my advice. You're not going to pay any commissions. And if you have to buy life insurance, don't use me, because I'm going to make a commission. And I don't want to be in that business making commissions." So they only will charge an hourly rate.

They can charge a percentage based on how much assets they're managing. Some advisors might charge a percentage of your total net worth, your house value, and so forth. So those are called fee only advisors. And then, the last one, guess what? There's a hybrid of both. There's ones who do commission, and they also do the fee-based work. I am personally a hybrid. I will tell you, the majority, 90 plus, if not more, maybe 95, 98% of my business, especially new business, is advisory. Most of the commissions I do now are one-off insurance or annuity sales, if it's required.

Jag:

So you're primarily fee based, but you do make some commissions and you're transparent about that as a fiduciary?

Rich:

That's correct. Actually, when you talk about disclosure, our firm, our broker dealer, to do something commission based, there's a lot of paperwork for suitability we have to fill out, not to present to the client always, but to present to our back office, to make sure what we're delivering is suitable for the client and in their best interest, even though we're not acting as a fiduciary. Another regulation came out called Regulation Best Interest, and those have higher standards for even the commission work now, for justifying why you're making recommendations. So our broker dealer takes us very serious, and some of the recommendations we have to make require like 10, 15 pages to be filled out. The best thing about all this, with our government regulators and all that kind of stuff, protecting the clients. We're not protecting an asset. We are, but we're protecting retirement goals. We're only on this earth one time, most people believe, and we have a great responsibility that we don't screw up someone's future goals, their dreams. That's the responsibility we hold.

Jag:

That's very well said. And that leads me into my next question, which is the benefits of working with an advisor who is acting as a fiduciary.

Rich:

So I think the first thing is making sure that all recommendations are based on the client's benefit, not driven by commissions or marketing reimbursements or anything like that from a vendor. But your goals risk change over time.

Jag:

True.

Rich:

So as a fiduciary working with you, I have to communicate with you and update those. What was suitable at the time of sale needs to be suitable a year later, three years later, five years later. So that's really important. One of the biggest problems in our industries is we hear "I never hear from my advisor unless I call them. And then, sometimes, they don't even call me back." That's probably the biggest complaint in our industry.

Jag:

Oof.

Rich:

So as a fiduciary, we're responsible for reaching out. I have to be proactive, not reactive. That's the only way I'm going to know if something changed. And what's even more important is managing clients' expectations. Their expectations might change, but not communicate them with you.

Jag:

True.

Rich:

So we have to be in constant communication, if not once a year, maybe a couple times a year. And more important, when something majorly change, the client needs to let us know.

Jag:

It's a two-way street.

Rich:

Which changes could be job. It could be retirement, it could be major expense, medical, whatever. Or "Hey, you know what, 2023, I thought my risk was pretty high. Let's reassess that, Rich. Let's maybe we can lower my risk and still meet my goals."

Jag:

And by risk, you mean risk tolerance?

Rich:

Correct. Yep. So the good thing is we're recording this on December 30th, and I'm so looking forward to 2023. Praying and hoping that we have a much better stock market than we did in 2022.

Jag:

I think we can all agree with that.

Rich:

Jag, the other benefits is, again, I think I mentioned it multiple times, the conflicts, that's really important. But here's something you may not be aware of. As an investment advisor, and I'm going into an advisor account, where I'm acting as a fiduciary, the investment choices are much more available. There's so much more to choose from. If I wanted to buy a no load mutual fund in a commission account, I wouldn't get paid. But in an advisory account, you're required to get good performing fund ETF stock, whatever you're looking for, meet the suitability at the lowest cost. So all the mutual fund companies out there, most of them, I shouldn't say all, most of them offer now different share classes for advisory accounts. Basically, they strip down a lot of their internal expenses, like the expenses for marketing and distribution for the advisory, and it's much cheaper than if you were to go and buy an A-share paid commission up front and have those expenses. So for them to stay competitive in the business, they had to change also.

Jag:

That's interesting. Okay.

Rich:

So that's probably one of the biggest advantages, because if I'm not acting as a fiduciary, I'm not looking at no loads. I still will look for a really good mutual fund, which meets your suitability goals, but it may not be the best of the best.

Jag:

Understood. Rich, a lot of important good information in our show today. Let's close it out by me asking you a pretty simple question. What is the most important thing ,out of our podcast today, that an investor should do?

Rich:

I think I might say the same advice for most of our podcasts when you ask a question like that, and that's "Ask questions." Ask the questions, write notes down too. That's the other thing.

Jag:

Oh yeah.

Rich:

This way, you can go back and say, "Hey, you said this on this day. This is what I wrote." A lot of times, when I meet clients, I write summary emails of what we talked about, and one of the comments I say, "If I wrote something down or didn't understand, please let me know." So ask questions. Ask, "Are you a fiduciary? How do you get compensated? How often are we going to talk? How often do you look at my portfolio? What do you need from me, so you could do your job better?" Great question. I get this question all the time. "Hey, Rich, I need to take a distribution. Which account should I take it from?"

"I don't know. Can you send me your tax return?" I don't know if you should take it from an IRA or non-qualified account or what we call taxable accounts. I don't know until I see your tax return. I will do a tax projection based on last year's return. I'll ask you what's changed for this year. Then I can put in the software, "Okay, he's taking so much money from the IRA. Is that pushing him up into a higher tax bracket? Is more of their social security going to be taxed? Are they losing any deductions or credits?" I won't know until you give me that information. Otherwise, I'm just answering it based on performance or liquidity needs.

Jag:

And I think that's a really a credit to you, Rich, that knowing how important that communication is to you and your firm on both sides of the coin, you talking to the client and the client talking to you, and the importance of that relationship. And like you said, that helps you do your job better. So if somebody listening wants to come talk to you about their finances or anything related to that in 2023, what are the best ways to find you?

Rich:

My preferred way is always just pick up the phone. Calling me. I love talking to people. It's 609-924-2049. My direct extension's 126. If you don't get me, just hit zero. Ask to schedule a phone call for later that day or the next day, and we'll catch up. If you want, shoot me an email at roring@ncfg.com. Of course, you can always go to my website at www.ncfg.com, and there's always a place on the website where you can schedule some time to meet me over Zoom or over the phone or face to face.

Jag:

There you go. Thanks so much, Rich. Great information as always today. Happy New Year, my friend.

Rich:

Happy New Year to you too, and your wife.

Jag:

Richard Oring's branch office is 1 Airport Place, Princeton, New Jersey, 08540. The branch phone number is 609-924-2049. Securities offered through Royal Alliance Associates, Inc. Member FINRASIPC. Advisory Services offered through New Century Financial Group, LLC, a registered investment advisor not affiliated with Royal Alliance Associates, Inc. New Century Financial Group LLC and Royal Alliance Associates, Inc. does not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.