The word “Fiduciary” gets a lot of attention in the financial services industry. But what exactly is it, and what does it really mean for investors?
Generally speaking, a fiduciary is someone acting on the behalf of another, usually in some kind of legal or financial capacity. Some examples of fiduciaries may include attorneys, trustees, estate executors, and accountants. In the financial services industry, Registered Investment Advisors (RIAs), like Financial Strategies Group, are held to a fiduciary standard by the United States Securities and Exchange Commission (SEC). This requires the RIA to act in the best interest of their clients and put their clients’ interests ahead of their own at all times.
This fiduciary duty sets RIAs apart from other financial representatives. Many investment professionals are only held to a suitability standard, which means their sole obligation to the client is to make investment recommendations and transactions that are suitable for the client at the time of the recommendation. They are not required to act in the best interests of the client at all times, which can often lead to unnecessary commissions and trading costs incurred by the client. The RIA, on the other hand, has to go above and beyond the suitability standard, not only recommending appropriate investments, but by consistently putting client interests first. Trust, confidence, and transparency are inherent in an advisor-client fiduciary relationship.
The SEC breaks down the fiduciary standard for RIAs into two main duties: the duty of care and the duty of loyalty. The duty of care is broken down into three components. The first is providing investment advice that is in the best interest of the client. An advisor thoroughly examines the client's entire financial picture, and works with them to establish goals and determine investment objectives based on their needs. Investment recommendations are derived from these established objectives.
The second component centers around best execution, where the advisor is responsible for executing securities transactions with the goal of maximizing value for the client. This involves choosing investments based on quality research, minimizing trading costs, and choosing reliable trading platforms and reputable custodians with quality trade execution procedures.
The third and last component of the duty of care is the duty to provide advice and monitoring over the course of the advisor-client relationship. An RIA does not simply sell a client a commissioned product, and that’s the extent of the relationship. Rather, an ongoing relationship is maintained. Financial plans and investments are reviewed on a periodic basis, ensuring the financial plan and investments are still appropriate for the client’s particular life situation.
The duty of loyalty focuses on putting client interests first at all times. To meet this duty, a full and fair disclosure of all material facts pertaining to the relationship are disclosed to the client. These disclosures provide the client with information on the firm, its representatives, and the firm’s policies and procedures. Also, any potential conflicts of interest that may impact the relationship are disclosed. The term “conflict of interest” can have a negative connotation. To be clear, it simply means any business or personal activity or relationship that MAY impact an advisory relationship. It does not mean it will impact your relationship with your advisor and your financial plan, nor that it will do so solely in a negative way. For instance, one of the most common potential conflicts of interest involves advisors also being licensed in other capacities, such as insurance agents, tax preparers, or lawyers. Just because an advisor may serve other roles doesn't mean it is going to harm a client-advisor relationship. In fact, many times it enhances it as the advisors gain knowledge in other financial arenas that may be beneficial to the client. RIAs are required to provide information on ANY potential conflicts of interests information is provided to the client up front, at the very start of the relationship, so the client is aware and understands how that could impact the investment advice rendered. Through this disclosure, full transparency is provided to those considering an advisory relationship. This allows potential investors to give their informed consent to such conflicts upon entering an advisory agreement.
The advisor-client fiduciary relationship is the foundation of our practice here at FSG. We hold ourselves to this high standard with pride. Through care and loyalty, we consistently strive to serve our clients, putting their needs at the heart of the relationship. Our client-centered approach to financial planning and investment management allows us to act solely in your best interests, cultivating long-lasting successful relationships built on trust and transparency.
Source: SEC 2019 Commission Interpretation Regarding Standard of Conduct for Investors, Release No. IA-5248
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Written by: Kristin Prieur