Wednesday, April 23, 2008

Word 'o the Day: Fiduciary (ABC's of Financial Planning)

“Thou shalt have no other gods before me.”

- God (The 10 Commandments #1)

There’s a lot of flim-flam in the investment management / financial advice industry. One of the articles I share with prospective clients is titled “8 Things Your Financial Advisor Won’t Tell You” by Liz Pulliam Weston (link at the end of this entry). Look it up and read it – it may raise the hair on your neck – and if you are shopping for a financial advisor, it should.

Number 2 on her list is “I have no obligation to put your interests ahead of my own.” In many cases in this industry, she is absolutely correct. Registered Representatives (aka “Stock Brokers”) are legally obligated to place their employer’s interests first – as for their customers, they are only required to treat them “fairly” and provide advice that is “suitable”. Other than this squishy limitation, the customer and her money are fair game. And if there is a dispute, virtually all brokerage company agreements include a mandatory arbitration clause that the customer must agree to before they will open an account.

In contrast, Registered Investment Advisers and their affiliated Investment Advisory Representatives are held to a fiduciary standard. The U.S. Securities and Exchange Commission (SEC) enforces the Investment Adviser Act of 1940 (Act), the legislation that governs the conduct of Registered Investment Advisers and affiliated persons. The SEC interprets the Act as meaning that a Registered Investment Adviser (and affiliated persons) is a fiduciary to its clients and owes those clients a duty of undivided loyalty and utmost good faith (italics added for emphasis).

Powerful words. It reminds me of the cliche: “It’s the 10 Commandments, not the 10 Suggestions”.


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