is fidelity a fiduciary

Is Fidelity a Fiduciary?

Fidelity, one of the most well-established brokerages out there, is well known as a discount broker for traders and investors. But like many other competitors, they also offer investment advice to employers with retirement plans and investors alike. This raises an interesting question, however: is Fidelity a fiduciary?

No, Fidelity is not a fiduciary anymore. They acted as point-in-time fiduciaries as long as the related DOL rule was in effect, but that changed when the U.S. 5th Circuit Court of Appeals struck it down. Now, they only offer investment advice, but without representing you as fiduciaries.

In this article, I will get into a bit more detail about why Fidelity is not a fiduciary anymore, answer whether they will ever be again or not, and explain the differences between a fiduciary and a broker.

Let’s get started right away…

Why Is Fidelity Not a Fiduciary?

The DOL regulation regarding the fiduciary role brokers would have to take was created by the Obama administration. In February 2017, however, President Trump delayed the implementation.

Now, on March 15, 2018, the 5th Circuit Court of Appeals vacated the fiduciary rule. In other words, brokers like Fidelity didn’t have to offer investment advice on the fiduciary level.

“Without the DOL rule, Fidelity will continue to provide point-in-time investment assistance to plan sponsors as a non-fiduciary under ERISA,” said Nicole Goodnow, the vice president of external communications at Fidelity. “This is the same capacity in which Fidelity provided investment assistance to plan sponsors before the DOL rule took effect in June 2017.”

Fidelity actually acted only as a point-in-time advisor for while. They basically gave advice to pension sponsors and regular customers alike without obligating themselves to continue doing so.

Will Fidelity Ever Be a Fiduciary?

Now, a question remains though: will Fidelity ever be a Fiduciary?

Short answer? There might be a chance for that…

In June of 2020, there was a new proposal by the Department of Labor which “reinstated the investment advice fiduciary definition in effect since 1975 accompanied by new interpretations that extended its reach in the rollover setting, and proposed a new exemption for conflicted investment advice and principal transactions.”

But it hasn’t been approved by the Biden administration yet, so we can only sit tight…

Is There Any Other Broker Who Acts as a Fiduciary?

No. Since there is no law obligating brokers to act as fiduciaries, none will act like one.

It makes sense if you think about it, though. What broker would waste resources to put the best interest of the customer first?

Unless there is a regulation that “forces” a broker to be a fiduciary, this is unlikely to happen.

What’s a Fiduciary?

In simple terms, a fiduciary is someone with the legal responsibility to put the best interest of another party before their own.

More specifically, if a broker acts as a fiduciary with you, they must simply give priority to your own financial interests and only then worry about theirs. For example, they wouldn’t be able to recommend a strategy that won’t benefit you.

It’s important to understand that fiduciary duty provides the ground for legal action if it’s violated. If you have a fiduciary financial advisor, for example, and they fail to put your best interest before their own, you have the right to sue them.

It is different when your advisor isn’t a fiduciary. You can only trust that they will act with your best interest in mind and you will have no way to do anything (legally) if that’s not the case.

Fiduciary vs Broker: What are the Differences?

1. A Fiduciary will Always Put your Best Interest First. A broker May or May Not Do that.

A fiduciary cannot recommend an investment product that is not absolutely a fit for you based on your best interest. A broker can and will if they like.

At the same time, a fiduciary will have to fully explain to you the risks involved with an investment. A broker doesn’t have that obligation. And the same applies to any conflict of interest. If there’s any, a fiduciary will have to disclose it to you, while a broker isn’t obligated by law to do so.

Basically, a broker has the freedom to offer you financial products that aren’t the best fit for your financial needs. They will, of course, provide you with any information about them that you like. But there’s no guarantee they’re not motivated by self-interest to promote them to you.

2. Fiduciaries Will Manage your Portfolio. Brokers Mostly Receive Orders from you.

A fiduciary advisor will not have to run every investment decision by you before they execute it. They can select stocks, mutual funds, bonds, and more for your portfolio without asking you first. They basically manage your investments for you, so that makes sense.

On the other hand, a broker will have to ask for your consent before they execute a trade on your behalf. You will have to give them an order to do so every time. Even if they act as financial advisors a lot of the time, they’re still a broker because of this limitation. Not a fiduciary…

3. Fiduciaries Are Not Paid On Commission, While Brokers Are

Fiduciaries are typically paid based on the size of the account that they manage.

Brokers, however, are more often than not paid on commission. For every trade that they execute for you, they get compensated. And that’s also aligned with the fact that they have an incentive to push you to frequent transactions.

At the same time, a broker is incentivized to promote investment products that they will receive a fat commission from.

Conclusion

As you can see, Fidelity isn’t a fiduciary and things are uncertain about whether or not they will ever be. It seems like they never acted as fiduciaries, but only as point-in-time advisors.

And as we already discussed, there are no brokers who will act as fiduciaries if there is no law to compel them.

Did this article answer your question? If so, please consider sharing it with others on social media. You can also leave a comment below and ask me anything you like…

Thanks for reading and I’ll talk to you next time.


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