The Fiduciary Standard: Investment Advisors vs Broker Dealers

In realm of investment advice investing , there are two primary channels that provide advice: investment advisers (which is our role), and traditional brokers who are employed by broker-dealers

The fundamental contrast lies in the fact that investment advisers are mandated by the Securities and Exchange Commission (SEC) to function as "fiduciaries," while brokers are obligated to adhere to a "suitability" standard.

As per the SEC's regulations, a "fiduciary" is obliged to prioritize the interests of their clients consistently above their own. On the other hand, the "suitability" standard that broker-dealers must meet only necessitates that an investment be considered suitable for a broker to recommend it.

The suitability standard can give rise to conflicts between a broker-dealer and the underlying client. The most apparent conflict relates to fees. Under a fiduciary standard, an investment adviser is strictly prohibited from acquiring a mutual fund or any other investment solely to earn a higher fee or commission. However, under the suitability requirement, this is not necessarily the case. As long as the investment is suitable for the client, it can be recommended and purchased. The suitability standard permits brokers to promote their own products ahead of potentially superior alternatives, which their firms often incentivize them to do. Furthermore, many brokers earn commissions from trades, creating an incentive to engage in frequent trading within client accounts to generate fees.

In the case of our firm, we believe that our incentives are genuinely aligned with the interests of our clients. We do not impose commissions and do not receive compensation for promoting specific investments. Our sole interest lies in safeguarding and increasing the value of our clients' assets because we are remunerated based on a percentage of those assets. If a client's assets appreciate, our compensation increases, and if they depreciate, our compensation diminishes. We see this alignment as completely eliminating conflicts of interest, fostering an environment where we prioritize the best interests of our clients.

When seeking someone to assist with your investments, a crucial question to pose is, "how are you compensated?" While it might be a challenging question to ask, it is vital to consider that the financial incentives of your money manager can significantly impact the long-term value of your portfolio.

For any questions on this or other topics please feel free to reach out to paul.hegdahl@hegdahlim.com or (415) 309-3472.