Mutual funds make it very easy to invest. But they come with some downsides to be aware of too.
What is the fiduciary rule?
The fiduciary rule is a regulation underpinning fiduciary duty, or the legal requirement for financial advisors to work in their customers’ best interest. Issued by the U.S Department of Labor, the fiduciary rule is meant to save ordinary Americans billions of dollars by regulating the types of actions fiduciaries can perform.
A fiduciary is someone tasked with overseeing someone’s asset investment. In the U.S. fiduciaries are bound by law to apply the highest standard of care to their customers, or beneficiaries, which is called fiduciary duty. Fiduciary duty means that the financial advisor is acting in the best interest of the beneficiary: making sound investments that maximize the beneficiary’s returns instead of the financial planner’s profits.
Fiduciary duty is established by regulations issued by the U.S. government. Over the years, the government has issued new fiduciary rules to expand who falls under fiduciary duty to include various types of financial advisors, including brokers and overseers of pension plans and individual retirement accounts (IRAs).
Fiduciary rules define who is a fiduciary; not every person whose job is to give financial advice falls under the fiduciary rule. Fiduciary rules also explain what types of actions a fiduciary can take, and whether those actions might clash with his fiduciary duty, such as when there’s a conflict of interest.
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Fiduciary rule example
In 2012, the Department of Labor released a fiduciary rule to cover how fiduciaries calculate and disclose the methodologies used in administering someone’s 401(k) retirement account. The fiduciary rule first clarified that the role of investing 401(k) assets fell under fiduciary duty, meaning that anyone who administers a 401(k) account on behalf of someone else must apply the highest standard of care. The rule also called for increased transparency so that plan holders can make better-informed decisions about where to invest their money, and for fiduciaries to standardize the formulas they use according regulations outlined in the Employee Retirement Income Security Act (ERISA).