This is my seventh article about interesting observations “hidden” in the fiduciary regulation and the exemptions.
There are three parts to the best interest standard . . .
- The prudent person rule.
- Individualization to the retirement investor’s circumstances.
- The duty of loyalty.
See the three parts below. Interestingly, none of the parts uses the word “best.” In other words, “best interest” is just a label; the real requirements are prudence and loyalty.
- Prudence: “. . . the fiduciary acts with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, . . .”
- Individualization: “. . . based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, . . .”
- Loyalty: “. . . without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”
Moral of the story: Don’t let the label confuse you. There isn’t any requirement to pick the best investment . . . if such a thing exists. It’s just old-fashioned prudence and loyalty. The result is that investment advice to IRAs will often look like investment advice to 401(k) participants: good quality investments, appropriate asset allocation and diversification, and reasonable costs.
To automatically receive these articles in your inbox, simply SIGN UP for a subscription and new articles will be emailed to you.