A couple of years ago the Securities and Exchange Commission commissioned a survey to determine if the investing public was aware of the difference between an investment adviser and a broker/dealer, whose sales representatives often identify themselves as “financial advisers.” To those of us who are in contact with those investors it was no surprise when the survey revealed that the vast majority of individual investors did not know there was a difference.
Investment advisers are registered under the Investment Advisers Act of 1940 and required to provide objective, fiduciary investment advice to their clients. They are not only subject to more strenuous regulatory requirements, but are fully liable for their advice and actions on behalf of a client. “Financial advisers” operate under the laws governing the sale of securities and are only held to a vaguely defined standard that requires an investment to be not-unsuitable to the customer. There is a world of difference between an investment adviser and a financial advisor.
The magic word that defines the difference is Fiduciary. A “financial advisor” is generally licensed as a securities salesperson but in some cases is only licensed to sell insurance. One of the things that such salespersons vigorously avoid is any language or action that would cause them to become a fiduciary. The American Heritage Dictionary defines “fiduciary” as “A person who stands in a special relation of trust, confidence, or responsibility in his obligations to others.”
A fiduciary is, by definition, legally obligated to work in the best interest of the person or organization by whom he or she is employed. A fiduciary is obligated to whenever possible avoid conflicts of interest, and if a conflict is unavoidable to fully disclose it to the person or organization who has entrusted the fiduciary with responsibility.
Does that make a fiduciary an expert? Not at all. There are two kinds of person who are dangerous to an investment portfolio. The first is the honest and sincere but incompetent agent. The second is the fully competent and qualified person who is primarily loyal to someone or something else. Of course, when a person is both incompetent and focused on enriching themselves or a corporation that is a double whammy!
Being a fiduciary at least eliminates one of the issues. The competence issue is another area where a wise investor will pay attention. With regard to financial planning and investment management the requirements for certification, continuing education, and fiduciary performance are most strenuous for the Certified Financial Planner (CFP®), Certified Financial Analyst (CFA®), and Certified Investment Management Analyst (CIMA®) designations. For income tax and accounting advice, the gold-standard is the Certified Public Accountant (CPA).
If a person or firm has taken the time and trouble to register with state and/or federal regulatory agencies as a fiduciary adviser then at least that declaration indicates a willingness to be held to a regulatory standard. While there is no legal reqirement for a person providing investment advice to have a certification, obtaining one of the more strenuous certifications indicates that the person rendering the advice has met at least the minimum requirements to apply the needed body of knowledge to your portfolio or situation.