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Fiduciary 101: Why It’s Our Job to Be Your Advocate

April 27, 2017

  • Fiduciaries are required to act in their clients’ best interests
  • Fiduciaries need to be able to show that they did their due diligence
2 min read

Fiduciary. It’s a big word that means a lot when it comes to handling your money. It defines a relationship built on trust and duty. Fiduciaries (like Stash) are required to act in their clients’ best interests.

With the uncertainty around the Trump administration and fiduciary rule, this is a good time to understand what the term means.

Primary Components of a Fiduciary Relationship

Brooke Harrington, the author of the book “Capital Without Borders,” describes fiduciaries’ obligation to behave with “loyalty, honesty, integrity, good faith, and transparency, and to put the interests of principals above their own, avoiding self dealing.”

Fiduciaries (like Stash) are required to act in their clients’ best interests.

These components are each important in their own right, and overlap in how they influence the nuances of fiduciary responsibility. The idea of good service is based on what a reasonable (or prudent) human would do.

This doesn’t mean that fiduciaries are held to the standard of perfection, but instead that their services and advice must aim at being reasonably good.

Fiduciaries need to be able to show that they did their due diligence; translation: They need to show that they’re satisfying what is required of them legally.

Fiduciary in celebrity news

Even if you’ve never heard the word before, the concept is all around us. Recently, hip-hop juggernaut Kendrick Lamar referenced the fiduciary relationship on his latest album.

On his most recent album, the rapper calls out singer Rihanna’s former accountant, whom she famously sued for mismanaging her finances.

A lot of people with money don’t understand the obligation of those who are handling their money.

Rihanna isn’t the only celebrity to found out about fiduciary responsibility the hard way. 

The actor Johnny Depp’s reported financial struggles sparked the New York Times to ask “Who Should Keep Tabs on the Money?” in a January 2017 article.

According to an April 2017 survey conducted by Financial Engines, only 21% of respondents understood the difference between a financial advisor who was or wasn’t a fiduciary.

That means that a lot of people with money don’t understand the obligation of those who are handling their money.

So what does fiduciary responsibility look like?

The Investment Advisers Act of 1940 was a piece of legislation that was created to regulate investment advisors (go figure!), and is still the guiding piece of legislation on this topic.

Sparked by the stock market crash and following depression, the SEC (Securities and Exchange Commission) prepared a report that eventually led to the act, in the hopes of preventing future mismanagement.

There’s also ERISA (the Employee Retirement Income Security Act), which is a federal law that “sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.”

This was a response to public concern about mismanagement and abuse of private pension plans, and applies to fiduciaries that provide services to retirement and pension plans.

Stash and fiduciary responsibility

Stash is an SEC registered investment adviser, which means we are subject to the Investment Advisers Act. We believe in a transparent relationship with our customers. We take our fiduciary responsibility seriously.

We also believe that as financially literate, empowered investors, fiduciary responsibility should be on your radar as well.

Knowledge is power. And now you know.

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By Clare Edgerton

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