A fiduciary, in short, is a financial advisor that's bound by ethics to act in your best interest. Without a rule in place, your money could go towards padding the pockets of financial firms instead of your own. Here's what you need to know about the fiduciary rule.

The fiduciary rule may seem boring (and maybe it is a little) but it’s extremely important for anyone who has a retirement account.

Recently, the Trump administration has halted the rule from being enacted—which would allow investment professionals to make financial decisions on your behalf that aren’t necessarily in your best interest.

Read on to learn more about the rule and what to look for in the upcoming months.

What’s a fiduciary?

A fiduciary is a general term for someone (or some company) that is obligated to have trust and show good faith to others—typically its clients. This includes being ethical and making decisions (or acting) in the best interest of others.

So what does that really mean?

Imagine your parents knew how into personal finance you were and they gave you their last $50,000 to invest for them. You’d probably want to do a good job, right?

You’d do everything you could to ensure you didn’t lose their money, but you also want to help them grow it.

Now imagine a guy you work with overhears you talking about this venture one day. He comes up to you and tells you that he can help you grow your parents’ money if you invest in this small business he’s starting. It’s an alternative way to invest, but he’s promising you great returns.

Not only that, but he’s also promising you a kick-back. So you achieve multiple goals—you invest your parents’ money, you earn them a return, AND you get a kick-back of cash for yourself.

Would you do it?

If you said NO, then you’re most likely acting in the best interest of your client—in this case, your parents.

Your parents know nothing about this guy or his business, and they asked you to invest their money for them, assuming you’d know which stocks to pick. By you veering away from their request in order to stuff your own wallet, you’re putting them at risk.

This is what a fiduciary protects against. It most often applies to those who manage money for other people—like financial advisors.

Ethical and legal vows

Fiduciaries are bound by both ethical and legal standards. In fact, I still remember when I was studying for the CFA exam (grueling by the way) the first section was entirely about ethics and nothing more. There was an entire book on the ethical principles of being a Chartered Financial Analyst. Breaking those ethics is like breaking a vow.

Fiduciaries are expected to make decisions and act in the best interest of you, the client. This means they can’t make financial decisions (like investing in a stock) for the purpose of their own financial gain.

What is the fiduciary rule?

So what exactly is the fiduciary rule? It’s a law that was originally put into place by the Obama administration (though not yet fully active) and now has the potential to be stopped by the Trump administration.

As I said above, the fiduciary rule states that fiduciaries (like financial advisors or people who manage the funds you invest in through your 401(k)) must act in the best interest of the client.

It’s an expansion of the Employee Retirement Income Security Act of 1974 (ERISA) that demands all financial advisors who work with retirement accounts must become fiduciaries.

I want to explain what this means because I think it’s that important.

Say a guy named Joe is the one who manages the investment fund you have 90 percent of your money in through your 401(k) at work. Joe is looking for a new stock to invest in. For argument’s sake, we’ll say he finds three different stocks and everything about them is identical, with the exception of one thing—their expense ratio. Stock A is the cheapest, Stock B is the middle price point, and Stock C is the most expensive. But remember I said that the stocks are identical. So assume they’re all in the same industry and they all generate the same exact return. If Joe is bound by the fiduciary rule, he’s obligated to choose the lowest cost option in this case – because it’s in YOUR best interest. You can see where this is going if the rule is overturned now…

The fiduciary rule is extremely strict. It’s one of the major reasons why financial advisors don’t make the same kind of money they did in the 80s. It’s because you have to be HONEST.

The rule has guidelines in place that require fiduciaries to disclose and avoid any potential conflict of interest (like if they’re best friends with the CEO of the company) and all fees and costs must be disclosed to you very clearly, so you know exactly what kind of fees you’re paying.

In order to help people comply with the rule, the Foundation for Fiduciary Studies came up with four best practices for fiduciaries to follow:

  1. Organizefiduciaries need to educate themselves on all the laws and rules that apply to their specific job-related situations.
  2. Formalizethey should identify a time horizon as well as have the client share their comfortable level of risk and expected return. Basically make a plan with the client.
  3. Implementact in the best interest of your client and make investments that are suitable for them, their plans, and their needs.
  4. Monitorkeep an eye on the portfolio and pricing that your client is experiencing and make adjustments that are in their best interest as necessary.

All of that sounds pretty common sense, right? Well there’s a chance all of this will be wiped out…

What happens if it’s stopped?

In February 2017, President Trump signed an executive order that could potentially stop the fiduciary rule, impacting a significant amount of financial investment advisors and providers of retirement options, such as 401(k)s.

The rule was set to go into place on April 10, 2017, but it’s since been delayed until June 9, 2017.

If stopped, likely not much would change. But the reason this is no good is because it negates the reason Obama put the rule into place to begin with. On February 23, 2015, Obama was quoted as saying the following:

Today, I’m calling on the Department of Labor to update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests…It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.

So by stopping this rule, it allows financial professionals the ability (or loophole) to act under what’s called the Suitability Rule. The Suitability Rule states that the broker has a duty to find investments suitable for the client, but their loyalty lies with the firm they work for. In layman’s terms, this means they can still pick investments that aren’t in your best interest.


There’s still a lot to come on this, and I wouldn’t be surprised if Trump delayed the rule from going into effect a little longer. Someone is definitely winning by not having the fiduciary rule in place—and it’s not you.

My advice is to do your homework on the topic—I’ve given you the basics of what you need to know already. Set an alert to follow it in the news (we’ll keep you updated here, too) so you know if and when the rule is put in motion.

Also, if you’re working with a financial professional, find out if they abide by any fiduciary standards (and get proof). Even though there’s no rule in place, it doesn’t mean they can’t act in your best interest still.

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About the author

Chris Muller picture
Total Articles: 281
Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He’s also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter.