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Advisors Fiduciary Responsibility

Summary: Investors should select an advisor that is obligated to act as a fiduciary. Investment advisors that act as a fiduciary have the fundamental obligation to act in the best interest of the client. It requires the advisor to put the client’s financial interest before their own.

The Security and Exchange Commission has recommended a uniform standard of conduct that would require brokers to have fiduciary duty. The SEC press release states:

“…retail customers should be protected uniformly when receiving personalized investment advice about securities regardless of whether they choose to work with an investment adviser or a broker-dealer.”

Believe it or not, brokerage firms are fighting the SEC so that they are not re-classified to have fiduciary duty. Currently, financial advisors adhere to a fiduciary duty while broker-dealers are subject to a less stringent suitability standard. Instead of addressing the issue of why brokers do not want to be fiduciaries we should examine why any client would want to work with an advisor that is not a fiduciary.

Gross Investments has done several portfolio reviews for clients whose money is managed by brokers. In many instances, the investments in the portfolios were obviously chosen to benefit the broker (through high loads and commissions) at the detriment of the client. The combination of the broker’s sales pitch and the investor’s lack of investment knowledge allow this situation to continue. It is not unusual for the client to continue to receive inappropriate investment advice over their lifetime. The broker prospers while the client suffers mediocre returns.

SEC Registered Advisors follow a different set of standards: Investment advisors are required to act as a fiduciary and provide investment advice in the client’s best interests. Investment advisors owe their clients a duty of undivided loyalty and utmost good faith. The investment advisor should not engage in any activity that conflicts with the interest of their clients and should take the necessary steps to fulfill their obligations. In addition, financial advisors must employ reasonable care to avoid misleading clients and must provide full and fair disclosure of all material facts to their clients and prospective clients.

Gross Investments is an SEC registered investment advisor and has fiduciary duty over its clients’ investments. Further, as a Chartered Financial Analyst, Gross Investments operates under an additional (and even tougher) set of standards: The Asset Manager Code of Professional Conduct. This code outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients. It provides standards and supportive guidance based on general principles of conduct. The Asset Manager Code of Professional Conduct states that managers have these responsibilities to their clients:

  • To act in a professional and ethical manner at all times
  • To act for the benefit of clients
  • To act with independence and objectivity
  • To act with skill, competence, and diligence
  • To communicate with clients in a timely and accurate manner
  • To uphold the rules governing capital markets

For more information on the benefits of investing with an SEC Registered Investment Advisor or Chartered Financial Analyst please visit Choosing an Advisor.

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