Can the SEC actually enforce the fiduciary standard or is it a matter of, “investor beware”? If so, then how can advisors give their clients the peace of mind that they are acting in a fiduciary manner?
Two Republican congressional members recently sent a letter to the SEC stating that they feel the SEC is more concerned with protecting the knowledgeable investor than the “mom & pop” investor. This is due to the Dodd-Frank measure requiring private funds of more than $150 million in AUM to register with the SEC. The SEC prioritized the reviewing of the private funds over the RIAs. Mary Joe White is quoted as saying “only 8% of RIAs are examined annually and 40% have never been reviewed.”
All of this talk in the media about how advisors should be held to the fiduciary standard has investors wondering if their advisor is held to the same standard. So what can you do to prove that you are a trusted advisor acting as their fiduciary?
Most RIA clients assume that their advisor is acting in their best interest. They trust their advisor and do not necessarily learn about or understand their investments or how the fees are calculated and how they pay their advisor.
We would like to think that fiduciary duties come naturally to all trusted advisors. The prospect of making more money can get in the way as the media has shown us; hence the need for regulation. As outlined in the article “Six Core Fiduciary Duties for Financial Advisors”, Knut A. Rostad, President of the Institute for the Fiduciary Standard outlines the following fiduciary responsibilities:
Serve the client’s best interest
Act in utmost good faith
Act prudently with the care, skill and judgment of a professional
Avoid conflicts of interest
Disclose all material facts
Control investment expenses
With or without regulation the advisor should be expected to perform all of these duties.
Serving in the client’s best interest means putting the client’s needs and interests before the advisor or their firm.
The advisor must act with complete loyalty to the client which means knowing all the details of their financial affairs. The advisor must have access to all investment and financial holdings and be able to monitor and report on them in a consistent and timely manner. The advisor must be truthful, honest and accurate in all their communication always acting in good faith. This can be achieved with open and frequent communication.
Avoid conflicts of interest by making compensation arrangements completely transparent.
Make sure the investor is seeing the fees directly from the source, not just the management or retainer fees you as the advisor charge but also the fees that are charged within the investment.
Ensure that the advisor or firm’s interests are not conflicting with those of the client.
Again, transparency into the holdings and the fees will allow the investor to monitor that. If there is a conflict of interest – Disclose, Disclose, Disclose – and make it clear and understandable! State the risks and the fees. Have the client agree to this conflict in writing.
Act professionally with care, skill and judgment.
The thoroughness of the research and analysis of the investment is more important than performance. This process is what makes a fiduciary advisor different from a sales professional.
Control the expenses of the investments. Make sure they are fair to the client.
Being the client’s fiduciary it is expected and required that you are fully aware of all financial assets and can give appropriate advice based on the goals of your client.
The regulation is in place to act as your client’s fiduciary even though the oversight may not be. Following the fiduciary responsibilities will earn you, the advisor, the trust and appreciation of your clients, which translates into client retention and referrals.
You may also be interested in:
Results from the 2013 Ipsos Affluent Survey USA (Webinar Replay)
Broader ERISA "Fiduciary" Definition: Legal Update (Complimentary Whitepaper)
Change Your Thinking and Decrease Your Reconciliation Process (Blog post by Karla Paxton, Client Engagement Manager, ByAllAccounts)