Attributes of a Fiduciary

In the investment world these days, fiduciary is a hot word and for good reason. It’s a long-term, win-win situation. Advisors working first and foremost on behalf of their clients, instead of their own interests, is a win for investors and a win for the investment management profession.

The definition of a fiduciary is a person or organization that owes to another the duties of trust and good faith and pledges to act in the other’s best interest. This sounds obvious, but how is that faith typically measured, monitored, and managed? I believe there are three ways being a fiduciary is conventionally measured.

First, advisors are moving toward fee-based business models and away from commission-based. I believe this is a very good trend, but I acknowledge many long-term investors who buy loaded mutual funds will often pay less in fees and have better investor experiences than those who frequently trade no-load mutual funds. With that said, I believe the fee-based model in general should help improve investor behavior as advisors counsel staying balanced instead of emphasizing a sense of urgency. I believe a fee-based model is better in the aggregate and the long-term behavior gap, which is the difference between an investment’s return and the investor’s return (taking into account cash flows in and out of the investment), will improve as more advisors adopt a fee-based model. Since behavior is the biggest cost to investors, this is a very positive change.

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