Are All Money Managers Fiduciaries? Not Necessarily.

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 or 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 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-dealer 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 adviser and held to the fiduciary standard), and
• sales-related compensation, including commissions compensation from the sales of investment products (when acting as a broker-dealer and held to the less stringent best interest standard)

Broker-Dealers

Broker-dealers 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 broker-dealers 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 broker-dealers more for recommending to their clients one investment product over another. This creates a sales incentive for the broker-dealer 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, broker-dealers were exempt from investment adviser standards as their advice to clients was deemed solely incidental to their securities sales. For a time, broker-dealers 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.