What Is a Fiduciary? Why It Matters for Your Financial Future.

Investment Advisers are held to a fiduciary standard under the Investment Advisers Act of 1940 given their important role in providing ongoing financial advice to clients. Investment advisers’ duties to clients include:

• Duty of Care: An Investment Adviser must always act in the best interest of their clients and in good faith.
• Duty of Loyalty: An Investment Adviser must place clients’ interests above their own, make full and fair disclosure of all conflicts of interest about their business. Investment Advisers cannot mislead clients. This includes identifying and addressing all material conflicts of interest by eliminating or disclosing such conflicts.

Investment Advisers

Investment Advisers provide ongoing advice and analysis about securities and investments to clients. The individuals who represent Investment Advisers are usually called Investment Adviser Representatives (IARs). However, registration status alone doesn’t guarantee or inherently imply a level of expertise, prudence, competence, or guarantee investment results.

Investment Advisers are regulated by the Investment Advisers Act of 1940. The 1940 Act regulates Investment Adviser activities and specifies the duty of care advisers have to their clients—the fiduciary standard. Depending on the amount of assets under the Investment Adviser’s management, Investment Advisers are regulated either federally by the SEC or by state regulators. In most cases, Investment Advisers regulated by the SEC are those larger, eligible firms with at least $100 million or more in assets under management (AUM). Once an Investment Adviser’s AUM reaches $110 million, federal registration with the SEC is mandatory. Unless covered by an exemption, all large Investment Advisers must register with the SEC. State registration is not required because federal law preempts state registration.

Investment Advisers can earn their compensation in a variety of ways. All Investment Advisers are required to disclose to their clients the details of their compensation, including any incentives or other compensation received for their investment recommendations. While all Investment Advisers are held to the fiduciary standard of care, some Investment Advisers and/or their IARs also engage in other business activities—like brokerage and insurance sales. Some forms of Investment Adviser compensation can include:

• fees charged as a portion of the assets under their management, also called "AUM-based"
• fixed fees,
• hourly charges, and
• performance-based fees

Unlike broker-dealers, who are expected to act in the still undefined “best interests” of clients only at the point of time of making financial recommendations, Investment Advisers uphold a continuous fiduciary duty. This means Investment Advisers act in the interests of clients as long as the relationship exists.

If the Investment Adviser or its representatives are registered as an Investment Adviser, a broker and/or an insurance agent, it’s possible they’re held to a different standard of care depending on their business conduct with a client. The professionals who engage in multiple lines of business are considered dual- or triple-registered agents. They can earn multiple forms of compensation:

• ongoing AUM-based fees charged as a portion of AUM (when acting as an Investment Advisers and held to the fiduciary standard), and
• sales-related compensation, including commissions compensation from the sales of investment products (when acting as a broker and held to the less stringent best interest standard).

Broker-Dealers

Brokers buy and sell securities on behalf of customers, on behalf of a broker-dealer firm, or both. They traditionally execute transactions on behalf of a client and earn commissions on those transactions. Some brokers are paid more to sell one product over another. Or the broker-dealer may engage in revenue-sharing agreements where mutual fund companies pay the broker-dealer and, further, pay the individual brokers more for recommending to their clients one investment product over another. This creates a sales incentive for the broker that a client may not realize.

Broker-dealers are regulated by the SEC and FINRA, a self-regulatory organization. Previously, the National Association of Securities Dealers (NASD) was the self-regulatory body for the brokerage industry until it merged with the regulation, enforcement, and arbitration arm of the New York Stock Exchange to form FINRA in 2007.

Historically, brokers were exempt from Investment Adviser standards as their advice to clients was deemed solely incidental to their securities sales. For a time, brokers were held to a “suitability standard,” as their role was to facilitate transactions for clients and recommend investments that were appropriate or “suitable” for a client, but not necessarily the best for a client. Attempting to address the gap between “suitable” advice and “best” advice, the Securities and Exchange Commission implemented Regulation Best Interest, or Reg BI, in 2020.

While an improvement over the suitability standard, Reg BI wasn’t the upgrade that investors may have hoped for. No clear definition of “best interest” was established and, since then, it’s only proven more confusing for investors to differentiate between who can be trusted with their wealth versus those who may not operate in good faith. Under Reg BI, broker-dealers are expected to act in the best interests of customers only when making financial recommendations. This may sound positive, but it falls short of the continuous fiduciary duty that registered investment advisers owe their clients.

Who handles sales, service and portfolio management?

Some financial professionals wear too many hats. They may focus on sales and have trouble returning client calls or managing client portfolios. When spread thin like this, these individuals may not be able to provide the level of service you may need to reach your long-term goals. But there are other options. Other financial professionals have specialized roles, separating service, sales and portfolio management duties to ensure you’re always working with someone focused in their area, and importantly, on you.

A firm’s corporate structure may also be a key consideration. For example, privately held companies often have the flexibility to prioritize client needs without external pressures. Publicly held companies, however, must balance serving clients with meeting shareholder expectations, which may create potential conflicts of interest as they focus on quarterly earnings and revenue goals.

When it comes to managing your investments, understanding how your assets are held and protected is essential. A third-party custodian plays a crucial role in safeguarding your financial future. This independent entity is responsible for holding and protecting client assets, separate from the investment manager. Here’s why working with a financial adviser who partners with a third-party custodian offers critical advantages:

• Increased Transparency: A third-party custodian grants you direct access to your accounts and statements, allowing you to independently monitor balances, verify transactions, and ensure your investments are being properly managed.
• Reduced Risk of Fraud: By separating asset custody from investment management, a third-party custodian prevents any single entity from having unchecked control, adding an essential layer of protection.
• Regular Audits and Oversight: Subject to strict regulatory audits and oversight, third-party custodians ensure client accounts are accurate and secure, uncovering irregularities quickly.
• Segregation of Duties: Dividing the responsibilities of managing and holding assets creates checks and balances, minimizing conflicts of interest and enhancing accountability in financial management.
• Enhanced Client Protection: With insurance safeguards and compliance standards, third-party custodians offer an additional level of security, protecting clients against potential fraud or mismanagement.

Choosing a financial adviser who partners with a trusted third-party custodian can be a crucial step in protecting your investments. This relationship fosters transparency, reduces risks, and ensures accountability, giving you peace of mind that your assets are being handled with care.