As an investor, you may want to consider the role your advisor plays within the fiduciary world, as it pertains to your portfolio. Is the manager being recommended really a best fit for my portfolio? Is changing my portfolio allocation really in line with my risk tolerance and retirement goals? These are just a few of the many questions you can sleep well at night knowing the answers to, by simply defining the role of a fiduciary.
Let’s start with a basic definition…
Fiduciary Defined: An individual in whom another has placed the utmost trust and confidence to manage and protect property or money; the relationship wherein one person has an obligation to act for another’s benefit.[1]
In considering this definition further, a fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by a client is actually accepted by the other party or partner entering into the relationship. The duties of a fiduciary include loyalty and reasonable care of the assets they are being trusted to invest. All of the actions of the financial advisor are performed for the advantage of the beneficiary (the client).
A fiduciary relationship should be a critical component to your selection process when choosing an advisory firm to invest your money with. So, it is important to know and understand the difference between a Registered Investment Advisor (RIA) and a Broker-dealer before making any selections.
An RIA (i.e., Beacon Pointe, amongst others) is registered with and regulated by either the Securities and Exchange Commission (SEC) or their appropriate state securities regulator(s) (depending on the wealth they manage), and is regulated under the Investment Advisers Act of 1940. A Broker-dealer (i.e., Morgan Stanley, Merrill Lynch, and Wells Fargo, to name a few) is usually a member of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization for broker-dealers doing business in the U.S. and is regulated under the Securities Exchange Act of 1934 [2]
Ok, enough data jargon. How do the two types of advisors differ?
Compensation: Broker-Dealers are typically compensated by charging a commission on the sale of an investment product, whereas RIAs are typically compensated by charging a fee for advice. [3]
Standard of Care: Broker-dealers are held to a “fair dealing” standard of care with clients, meaning that their investment recommendations must be suitable for the needs of the client. RIAs are subject to a “fiduciary” standard of client care, meaning that their investment recommendations must be in the best interest of the client AND the client’s interests have to take precedence over their own.[4]
The “fiduciary standard” of service has been a topic of interest with the Obama Administration and the Department of Labor. The Department of Labor is currently working on a regulation that would change the investment advice standard applicable to retirement accounts (such as 401ks) and potentially IRA Rollovers, to a fiduciary standard. Broker-dealers might be able to sign a contract to charge for commission-based services, under the “Best Interest Contract Exemption.” This exemption would require advisors to act with the care, skill, prudence, and diligence defined by the fiduciary standard; it would also require an adoption of policies to identify and mitigate conflicts of interest, clearly and prominently disclosing any conflicts (like hidden fees often buried in the fine print or backdoor payments) that might prevent the advisor from providing advice in the client’s best interest. [5]
Important Disclosure: This content is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. Some information may have been obtained from third-party sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. An investor should consult with their financial professional before making any investment decisions.
[1] Definition of Fiduciary: http://dictionary.reference.com/browse/fiduciary?s=t
[2] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 2-3. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011.
[3] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 4. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011.
[4] Skip Schweiss. Advisor Corner: Understanding the Differences between RIAs and Brokers, Suitability and Fiduciary. Page 1, Paragraph 4. http://www.tdainstitutional.com/tdai-en_us/resources/document/RIAs_and_Brokers,_Suitability_and_Fiduciary1.pdf. TD Ameritrade, Inc. and Registered Rep. 2011.
[5] Department of Labor Fact Sheet: Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html
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