March 04, 2009


The return of the stock market [or lack thereof] during the past 15 months has many people second-guessing their investment choices (as well as the 'suitability' of financial advice received). Unfortunately, many people are unaware that not all financial professionals are required to work in your best interests...

A fiduciary relationship is one bound by law to place the interests of its beneficiary (client) first (before its own interests). You would think that anyone offering financial advise to clients would have a fiduciary responsibility ... this is not the case, however. Brokers (sometimes called "registered representatives," "wealth managers," etc.) are not fiduciaries even though they may be perceived as such.

A Registered Investment Advisor, subject to the Investment Advisers Act, has a fiduciary responsibility. The "legal" standards of advising for a fiduciary vs. non-fiduciary relationship are very different. A non-fiduciary (such as a broker) is only required to follow a "suitability" standard. In English, this means that a broker can place personal interests ahead of its clients. It isn't difficult to provide 'suitable advice' to someone, even when that advice isn't the best advice. The relationship between the broker and its broker-dealer come before the interests of the broker's clients. On the other end of the spectrum, a fiduciary must follow a "trust" standard (generally considered the highest legal standard), placing the interest of clients ahead of its own, providing its "best advice" to a client.

A simple illustration can highlight this distinction. Two different investments might be equally suitable for a given client, but one might compensate the financial professional to a greater extent. An investment adviser relationship would require such a disclosure while broker rules would not.

Doug Shulman, vice chairman of the Financial Industry Regulatory Authority, is well aware of the challenge facing investors. “As investors turn to financial professionals to help them manage their assets, they often do not know the difference between insurance and securities products, or fiduciary duties versus suitability obligations. They just want someone they can trust to help them put their money to work so they can meet their financial and life goals.”

The parameters of an investment adviser’s fiduciary duty will depend on the scope of the advisory relationship, but generally include:
• Place the interests of clients first at all times.
• Have a reasonable basis for its investment advice.
• Investment decisions consistent with agreed upon client objectives.
• Treat clients fairly.
• Full disclosure regarding conflicts of interest.
• Respect the confidentiality of client information.

Obviously every investor wants to know the person they work with is working "for them." To that end, there are things you should know ...
- Are they legally obligated to work in your best interests at all time?
- Do they disclose all potential conflicts of interest?
- In what ways do they receive compensation?
- What are their credentials (and what does that mean)?
- Has any disciplinary action been taken against them (broker check)?
- How can I decide?