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Gadsden Office
508 South 5th Street
Gadsden, AL 35901
Phone: (256) 546-3243
Fax: (256) 546-3249
Toll free: (877) 546-3245
Nashville Office
5123 Virginia Way
Brentwood, TN 37027
Phone: (615) 371-5222
Fax: (256) 546-3249
Toll free: (877) 546-3245

What does the word fiduciary really mean?

The National Association of Personal Financial Advisors (NAPFA) defines it as ‘a Financial Advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the Financial Advisor is required to act with undivided loyalty to the client. This includes disclosure of how the Financial Advisor is to be compensated and any corresponding conflicts of interest’. It is putting the client FIRST in all dealings.

There are advisors that sell products and those that do not.  How can I tell the difference?

Some advisors work under what is referred to as the ‘Suitability’ requirement; while other advisors must adhere to a ‘fiduciary’ duty.  So how do you know the difference?  The suitability requirement is less stringent than the fiduciary requirement.

Suitability Standard

The Investment Company Act of 1934 requires all brokers and dealers (someone managing a broker) to pass certain licenses to be able to sell investment products.  Some of those licenses are series 6, 63, 7, 24, 65, and so forth. The term ‘stockbroker’ is associated with those types of licenses.   The focus of this Act is that it requires a stockbroker to have adequate and reasonable basis for their recommendation – also known as making sure the investment is a suitable investment and is suitable for the client. The broker has an obligation to investigate and obtain adequate information about the security it is recommending.  The broker also has a duty of care to make sure that the recommended security is right for the client; therefore the Broker must get to know the client well enough to make that recommendation.  That is where the obligation stops; they are not required to put the client’s interest ahead of their own interest or those of their company.   Selling investments should not be confused with giving investment advice.   To read about the Investment Company Act of 1934 suitability requirements go to http://www.sec.gov/answers/bd-persinfo.htm.

Fiduciary Requirement

Under the 1934 Act brokers were selling products while implying they were giving investment advice.   Therefore, the Security and Exchange Commission (SEC) adopted the 1940 Investment Advisor Act.  The SEC mandates that if you hold yourself out as giving advice then you must register as an Investment Advisor. The Investment Advisor’s Act of 1940 requires that the companies that register as a Registered Investment Advisor and the Investment Advisor Representatives that work for those firms have a fundamental duty of fiduciary care to the client.  By virtue of this law you are a fiduciary to your client if you register with the SEC as an Advisor. The Security and Exchange Commission that governs the Investment Advisor’s Act of 1940 states that if you are a Registered Investment Advisor (either under your state or under the SEC directly) you must at all times put the client’s needs before your own. In putting your client’s interest first you will, of course, be looking at suitability, too (which falls under the 1934 Act).  So under the 1940 Act you are doing what is required under the 1934 Act (the suitability standard) and you are complying with the 1940 Act as a fiduciary.  As a fiduciary you must operate in a fashion the same as a lawyer, doctor, or accountant. As a Fiduciary you must eliminate, or at least disclose, all conflicts of interest that might incline you — consciously or unconsciously — to render advice that is not in the best interest of the client.  To read about the fiduciary requirements under the Investment Advisor’s Act of 1940 go to http://www.sec.gov/divisions/investment/advoverview.htm.

You can find information about this and other information including how to find out if your Broker or Advisor has any regulatory issues or sanctions by visiting www.sec.gov.

Another article of interest on this topic, although it is very lengthy, will give you more information about the difference between brokers-dealers and (true) investment advisors.  This SEC commissioned RAND to produce this report. It can be found at http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf