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.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.
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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.