What is a Fiduciary?
Registered Financial Advisors are fiduciaries, and are held to a much higher and completely different standard of care for their clients than other types of financial professionals. A fiduciary must always act in their clients best interests.
Having your investments managed (or at least thoroughly reviewed) by a Registered Financial Advisor can help to identify and eliminate many potential conflicts of interest.
But why a Registered Financial Advisor?
The nature of the relationship between a client and a registered investment advisor is significantly different, as advisors have no incentive to generate excessive fees or trades (as they take no commission) and also do not have incentive to peddle proprietary investments as the majority of advisors charge a flat rate management fee.
Essentially, because advisors must act in the best interests of their clients, the incentive structure is built in to the relationship to accomplish just that, with the advisors’ incentive tied to the client’s success.
Relationships where the interests of both parties are aligned help to reduce or eliminate conflicts of interests.
Conflicts of Interests
One of the most common pitfalls that investors find themselves in are proprietary funds. For example, many investors who have broker/dealers manage their investments find themselves invested in said broker/dealer’s proprietary investment funds.
But why is this a problem?
The problem lies in the nature of the relationship between a broker / dealer and their incentive structure. Broker Dealers take a cut of each transaction made (often marking up securities significantly before selling them), and are often extremely incentivised to sell their own proprietary investments which tend to be much higher margin products for the broker /dealer.
In fact, the SEC has been trying to eliminate some of the misleading titles that brokers often use to establish trust with their clients:
“The Securities and Exchange Commission (SEC) recently abandoned a proposal to prohibit the use of the term “adviser” (spelled adviser or advisor) by representatives of a broker-dealer. The purpose was to distinguish brokers (who do not have a legal obligation to act in the best interests of their clients) from advisers (who are registered with the SEC as investment advisors and held to a fiduciary standard when working with clients).”
Brokers are not fiduciaries.
This means that they are not in the business of acting in their clients best interests, and typically will try to get you into their own higher margin investments.
Additionally, because the broker only makes commission or fee on trades they may be enticed to generate an unnecessary or excessive number of trades. This highly illegal (but rarely caught) practices by brokers is called churning.
A recent example of this unethical practice was carried out by a broker at Stanley Morgan, in which they churned one of their accounts to the tune of $9 million. FINRA commented:
“Churning the account of an elderly customer who suffered from severe cognitive impairment is an egregious violation of the high ethical standards to which Finra holds all associated persons.”
A financial advisor is a financial professional with a fiduciary duty to their clients, and must always act in the clients best interests. Other types of financial professionals are not bound by the same fiduciary duty, so if investors have not consulted with a financial advisor previously it could be extremely beneficial.
For investors, one of the largest benefits of working with a fiduciary such as a financial advisor to manage or review their investments is that the advisor must always place the clients interests ahead of their own. Relationships like this help to ensure that clients receive the highest standard of care, and greatly help to reduce or eliminate conflicts of interests. Durig has extended its professional fiduciary services, contact us today!
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Disclaimer: Durig Capital (DBA as “Durig”) is a registered financial advisor that provides investors with a specialized, transparent fiduciary service at a very low cost. Please note that this is not investment advice from Durig Capital. We are not a broker/dealer, and this is not a recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.