What is a Fiduciary? Why You Should Care.

As an investment advisor registered under the Investment Adviser act of 1934, I am required to put my clients' interests first.  This is known as a fiduciary standard.  Brokers are not held to the same standard, unless they happen to hold the CFA (Chartered Financial Analyst) designation.  (The CFA Institute's Code of Conduct and Standards of Professional Conduct require CFA charterholders to act as a fiduciary by putting their clients' interests first.)  The CFA Institute's Code and Standards may be found at the following link:

http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2010.n14.1

This short article reviews the confusion, even among investment advisors and brokers, about what it means to be a fiduciary.

http://www.advisorperspectives.com/newsletters11/When_is_a_Fiduciary_not_a_Fiduciary.php

Another good article on this subject may be found here:

 

http://www.labradorinvestment.com/uploads/tdw.pdf

What does "putting your client's interests first" mean?

• A fiduciary puts himself into the other person's shoes.  He/she makes investment decisions as if he were the client, taking into account the client's investment objectives, including risk tolerance and need for income, among other factors.
• A fiduciary places trades in their clients' accounts before they place a trade for the same common stock or other investment in their own accounts.
• Similarly, a fiduciary will sell a common stock or other asset out of client accounts before he places the sell order in his own account.
• A fiduciary does not sell common stock or other investments out of their own account to clients, as brokers often do.  Brokerage firms often earn significant undisclosed profits by trading as principal (buying or selling stocks or bonds for the brokerage firm's own account) with their customers.
• Investment advisors do not sell clients mutual funds or other so-called "proprietary products" -- their own brand of mutual funds or investment vehicles.  Some brokers will sell their own brand of mutual fund or other investment vehicle that pays a higher commission rather than mutual funds run by a rival firm that pay lower commissions.
• Investment advisors who do not take commissions (and instead charge fees based on a percentage of assets, a flat rate or an hourly rate) do not have an incentive to buy and sell stock to produce commissions.  In other words, they do not have an incentive to "churn" the client's account.
• Investment advisors are under a continuing duty to assure that the investments in client accounts, taken together as an entire portfolio, are appropriate for the client.  As time passes, the client's investment objectives may change, and if that is the case, adjustments to investment holdings may be appropriate.  Brokers are only held to a "suitability" standard, in which they are only responsible for assuring that the investment is appropriate for the client on the day that the investment was purchased.