William Byrnes' Tax, Wealth, and Risk Intelligence

Last week, I noted that a court overturned the DOL’s new “fiduciary” rule.  Since its enactment, the new rule has been a point of contoversy within the investment community.

However, what exactly is a fiduciary standard?  Let’s begin by looking at the definition of fiduciary, which, according to the Merriam-Webster online legal dictionary, is

“one often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation : one (as an agent) having a fiduciary duty to another.”

The definition contains a number of key concepts:

1. “one … in a position of authority.”   The person on whom the law places the duty is “superior” to the other person, usually because the fidicuary has a specific skill-set that the other does not.  The fiduciary is an expert.
2. The fiduciary “act[s] on behalf of another.”  The fiducairy must not consider himself ot his personal situation when making decisions, but instead the situation of the person for whom he is exercising his skills.
3. The fiduciary “assumes a duty” or a “moral obligation.”  There’s an ethical component to the duty; it’s almost like a higher calling.
4. The fiduciary must act
   1. In good faith: The Restatement of Contracts defines good faith as, “honesty in the fact of the conduct.”  Most other areas of law use similar terminology and concepts.
   2. “and with care, candor, and loyalty.”  To a certain extent, these restate the need to act for another instead of oneself irrespective of the fiduciary’s situation.
5. The definition for obligation contains a number of phrases that imply a moral component …
   1. “binding oneself … by a moral tie.”
   2. “A duty … to follow a code.”
   3. “A course of action … imposed by conscience.”
      1. (The American Heritage Dictionary, (c) 1985).

Because the fiduciary has more knowledge or skill in a particular area, he can also take advantage of his client.  The law therefore casts the relationship between the fiduciary and his client in moral terms.

In 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance Law, Captive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.