Is your investment portfolio being managed in the context of a fiduciary relationship? In other words, is a Registered Investment Advisor (RIA) managing your portfolio? |
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Today the world is awash with people who want to sell you investment products and policies and give you investment advice. Many of them have conflicts of interest that you may not know about or may not have given much thought to.
Registered Investment Advisers, on the other hand, have a fiduciary obligation to put your best interests above their own interests and above the interests of the firms for which they work. When you are choosing your portfolio manager, consider these differences between having an RIA and someone else manage your portfolio: |
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| Registered Investment Adviser (RIA) |
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| Others who may wish to manage your portfolio or give you investment advice |
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| RIA designation means the adviser is a fiduciary. |
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| Designations such as Certified Financial Planner CFP®, ChFC, CFS and CLU do not mean the person is a fiduciary. Brokers are not fiduciaries. They are in the business of selling securities. |
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| Does not earn commissions on investment-account transactions. Has no incentive to churn your account. |
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| If a brokerage firm manages your portfolio, they earn commissions on trades in your account. They may be tempted to churn your account. |
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| Does not manufacture derivatives or other investment products. Has no incentive to sell or recommend to you investments that are not in your best interest. |
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| May work for a firm that manufactures derivatives, collateralized debt obligations (CDOs) or other exotic investment products or policies. May be under pressure from firm to recommend investments that the firm creates. |
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| Does not sell investment-banking services. Has no incentive to recommend stocks or other securities issued by a specific company. |
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| May work for a firm that also sells investment-banking services. May be under pressure to recommend securities issued by the firm's investment-banking clients. |
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| Registered with and requlated by the Securities and Exchange Commission (SEC) whose mandate is to protect investors. |
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| Brokers are not required to register with the SEC. Must be registered with the National Association of Securities Dealers (NASD), an industry group that serves the interests of securities brokers and dealers. |
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| Required by SEC to provide "fiduciary care," that is, to act in your best interest. |
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| Brokers are required by NASD to recomend to you securities that are "suitable" for you. |
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| Required by SEC to disclose all potential conflicts of interest. |
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| Brokers and "financial planners" are not required to disclose potential conflicts of interest. |
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| Receives compensation directly from you based on size of your portfolio and on performance of your portfolio. |
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| Brokers and "financial planners" may receive compensation through complex, overlapping and often hidden sets of arrangements. |
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| If an RIA breaches his or her fiduciary obligations to you, you can sue him or her in a court of law for nonfeasance, misfeasance or malfeasance. |
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| Brokers cannot be sued by you in court for nonfeasance, misfeasance or malfeasance. Your contractual agreement with them requires you to submit your grievances to their industry association, the National Associationi of Securities Dealers, for binding arbitration. |
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| When you meet with anyone who offers you financial advice or asks to manage your portfolio, ask: "Are you a fiduciary? Will ours be a fiduciary relationship?" Unless he or she answers, "Yes, I am a Registered Investment Adviser," you probably do not want this person to manage your portfolio.
If someone you care about begins a conversation with, "My broker told me...," you may want to say, "Your broker has no fiduciary obligation to give you advice that is in your best interest." |
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