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RIAs & Fiduciary Duty
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Investment service representatives go by many different names these days like “wealth managers,” “investment consultants,” or the ubiquitous “financial advisors.” The name-changing can be confusing, but there are important differences people should understand to ensure they use the right representatives for their needs. In this article, we look at one of the most important differences – fiduciary duty.
Fiduciary defined
A “fiduciary” is a person or entity entrusted with managing finances and/or property for another party, known as a “principal.” Fiduciaries are legally required to operate with prudence, honesty, and good faith to place the interests of principals before their own at all times. A fiduciary duty is among the highest standards of care recognized by law. As such a fiduciary is held in a position of tremendous trust and confidence and is expected to be extremely loyal to the principal to whom he/she/it owes the duty.
The RIA difference
Most investment representatives (“financial advisors” or otherwise) are not legally required to be fiduciaries at all times. Most financial advisors are brokers and agents who are paid commissions by banks, insurance, and fund companies to sell products. The reality is those advisors are paid to represent the interests of companies, not the interests of clients.
On the other hand, registered investment advisors (RIAs) do not sell financial products and are not paid commissions. RIAs are in the business of providing investment advice to clients. That advice is commonly provided through financial planning and investment management services. Whatever the service, RIAs represent client interests and have a fiduciary duty to clients.
Different laws and duties
The difference seems subtle on the surface, but it is significant because RIAs are regulated by different laws. Federally regulated RIAs are subject to the Investment Adviser’s Act of 1940. Under these laws, RIAs are legally obligated to place client interests before their own, at all times. This duty is uncommon in financial services.
Most investment representatives are registered and regulated as brokers (aka "registered representatives"). Brokers are subject to the Securities Exchange Act of 1934. Under these laws, brokers are not required to place client interests before their own at all times. Again, this is because brokers are compensated to sell products, not to provide advice.
RIAs are subject to a higher standard of care because clients hire RIAs specifically to provide investment advice. That places RIAs in a position of explicit trust, and thus RIAs are required by law to uphold a fiduciary duty to clients.
Beware the juggling act
Something to note is that representatives may play different roles as brokers, insurance agents, bankers, RIA representatives, and others simultaneously. This is common at large financial conglomerates that juggle multiple businesses and services. While this may offer convenience, it also complicates the relationship.
For example, how do clients know when their interests are being represented? Does it depend on which “invisible hat” the representative is wearing? Can we trust the representative to disclose “I am not acting in your best interests currently?” This lack of transparency can be lucrative for firms, but expensive for clients.
If you are uncertain of whether your "advisor" is a broker, you can use the Financial Industry Regulatory Authority’s (FINRA) “BrokerCheck” online tool to find out. The tool not only reports if a representative is currently actively registered as a broker (who is paid commissions to sell investment products) but also provides background and disciplinary information on the individual.
Similar information can be found on insurance agents (paid commissions to sell insurance products) through your State’s Department of Insurance website. For California use the state's DOI’s “Check License Status” online tool.
The bottom line
Investing is complicated enough as it is, investors should not need to second-guess which side of the table their "advisors" are sitting on. BCM is a 100% fee-only, registered investment adviser-only firm. BCM does not engage in other businesses like brokerage, banking, or insurance.
That means BCM maintains a fiduciary duty to clients 100% of the time. For additional information about evaluating and choosing an advisor, please request BCM’s white paper “Questions for Your Advisor.”
The purpose of this article is not to imply that all RIAs are good or that all others are bad. It is to clarify RIAs provide different services and have different duties to their clients versus other “advisors.” Ultimately, what type of advisor is appropriate to use depends on an individual’s needs and objectives.
See the diagrams below for a summary of the different relationships reviewed in this paper. If you have any questions or needs regarding your investments please feel free to contact BCM.
Copyright | 2018 | Bellwether Capital Management LLC | All Rights Reserved
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