Fiduciary can mean many things across different industries. In finance, it is someone who acts on behalf of another person, putting their clients’ interests ahead of their own. Being a fiduciary thus requires being bound, both legally and ethically, to act in the other’s best interests. That confidence is crucial when trusting your financial future to a company or person.
Registered Investment Advisers (RIAs) are regulated by the Investment Advisers act of 1940 and are held to a strict fiduciary standard, providing full disclosure of their fees and any conflicts of interest they may have. RIAs are regulated by the Securities and Exchange Commission (SEC) and sometimes state regulators. The SEC is a government entity that oversees several aspects of financial business and promotes fair dealing, disclosure of important market information, and aims to prevent fraud.
RIAs generally manage client relationships holistically, looking at all facets of your financial life, including insurance coverages, tax exposure, financial planning, retirement planning, and estate planning. They are generally paid on a fee-only basis or a percentage of assets under management. Most RIAs have an advisory agreement with their clients giving them discretionary control over their clients’ managed assets, allowing them to make investment decisions in their best interest.
Broker-Dealers are primarily a transactional business, facilitating the purchase and sale of investments for their firm or customers. Brokers generally require the clients’ permission to buy or sell an investment and are customarily paid a commission on the execution of the sale or purchase. Brokers are regulated by the Financial Industry Regulatory Authority (FINRA), a private industry group, that enforces a “suitability rule,” meaning the Broker must recommend investments in line with the client’s goals.
Regulation Best Interest is a new rule by the SEC that aims to hold Brokers to a higher standard. It obligates them to disclose information about their recommendations; exercise diligence, care, and skill when making a recommendation; abide by policies that address conflict of interest, and to comply fully with policies and procedures designed to fulfill the regulation. While Regulation Best Interest is a step in the right direction, Brokers can still recommend investments or trades that will produce a larger commission for them or their firm.
Further confusion between the two business models is when both RIAs and Brokers employ Certified Financial Planner™ (CFP®) practitioners to service their clients. The CFP® practitioner is committed to CFP Board to provide a fiduciary duty to act in clients’ best interests. For example, the CFP® practitioner who works for an RIA is compensated with a flat or hourly fee for the financial plan and percentage of assets under management; therefore, as the clients do better, so does the adviser. The CFP® practitioner who works for a Broker-Dealer must apply his fiduciary duty to accounts he manages but not to the formation of the financial plan he creates.
When working with a financial adviser, remember trust is earned when actions meet words.
If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
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This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
