What is a Fiduciary Duty and Who is a Fiduciary Advisor?

What is a Fiduciary Duty and Who is a Fiduciary Advisor?

December 11, 2017
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During a recent client meeting, my client stopped me and said, "You know, I read an article the other day in the Wall Street Journal that used this term…fiduciary…and I didn't really know what a Fiduciary was and why it was important to me?”


What is the Fiduciary duty?

2017 may be the year fiduciary standard finally takes center stage in the personal financial advice profession. The Department of Labor’s (DOL) Fiduciary Duty Rule, scheduled to be implemented on June 9th, expands the “Investment Advice Fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA).
The fiduciary duty requires an investment adviser, by law, to act in the best interest of his clients, putting his clients’ interests ahead of his own at all times. Under the fiduciary duty, an investment adviser must provide advice and investment recommendations that he views as being the best for the client, also adhere to the duties of loyalty and care. An investment adviser, subject to the fiduciary duty, is required to provide up-front disclosures to the client, before any contracts are signed to provide investment advice. These disclosures cover important topics such as the investment adviser’s qualifications, services provided, compensation, range of fees, methods of analysis, record of any disciplinary actions and possible conflicts of interest, if any. An investment adviser that has a material conflict of interest must either eliminate that conflict or fully disclose to its clients all material facts relating to that conflict.


Why is Fiduciary Duty Important?

Many of you have investment experience via a stock broker, bank, insurance company, or other financial advisor that were not a Registered Investment Advisors (RIA). You may have been presented with investment suggestions or ideas that the broker or advisor felt was suitable for you. Let’s be clear, this does not mean that they were necessarily the best solution or most cost-effective strategy. The decision of suitability was based on a number of factors including your income, liquidity needs, and investment experience. What many people fail to realize is that the broker or financial advisor is not necessarily required to do what is in your best interest. Simply put: as long as the investment recommendation was “suitable” for you, they fulfilled their duty. However, this investment could have been primarily selected because it provided a higher commission or other benefit to the salesperson/advisor.
Today the world of investment advice is plagued with conflicts of interest, obscure disclosure and an overall lack of transparency. Seeking out an investment adviser who will act as your fiduciary can help to eliminate many of the problems associated with commission-oriented, product focused salespeople. Because a fiduciary is required, by law, to give full disclosure of how they are paid as well as any conflicts of interest they may have, before you do business with them, you as the consumer are in a better position to make an informed decision.


Who is a fiduciary advisor?

Investment Adviser representatives (IAR) provide ongoing advice and investment management based upon the client’s objectives. Typically they are given discretionary authority over the client’s investments. Discretionary authority allows the investment adviser representatives to make investment decisions in the portfolio without having to get prior approval from the client. Investment adviser representatives carry a license called the “series 65 or series 66.” They are monitored by either the U.S. Securities and Exchange Commission (SEC) or state regulators, and also subject to the higher legal standard of care known as the fiduciary duty.

Stockbrokers are defined as any person engaged in the business of effecting transactions (buying and selling securities - trading) for the account of others. Stockbrokers are generally not considered to have a fiduciary duty to the client and are able to avoid the higher legal standard of the fiduciary duty due to an exemption they receive from the definition of Investment Adviser (fiduciary). This exemption, which can be found under section 202 (a) (11) (C) of the Investment Advisers Act of 1940 reads: any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor. Brokers are instead expected to deal fairly with their customers and adhere to the lower standard of legal care, known as the suitability standard. The suitability standard requires a broker to know her customer’s financial situation well enough to recommend investments that are considered suitable for that particular client. Brokers are not required to provide up-front disclosures like the ones required for investment advisers. Most of the financial advisors working at the largest Wall Street Brokerage firms (wirehouses) fall into this category. Brokers carry a license called the “series 7.” Brokers are monitored by the SEC, state regulators and industry self-regulatory organizations.

Dual Registration (Hybrid Advisors) Today a large number of financial advisors serve as both investment adviser representative and broker. For example, you open several accounts with a financial advisor employed by one of the major brokerage firms. The advisor may sell you a “fee-based” account where she acts an investment adviser and concurrently sell you equities or ETFs in another account where she gets a commission and functions as a broker. They can open investment advisory accounts with fiduciary duty and brokerage accounts with suitability standard. Hybrid advisors carry a license called the “series 7 and series 66 (or series 63 and 65).”

Currently my fee-based investment advisory service with dual registration has embraced its role as your fiduciary and endeavored to put my clients’ interest first. This will not change….EVER.
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------This opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individuals. To determine which investments may be appropriate for you, consult with your financial advisor.