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Investment Adviser as Fiduciary

Sunday, March 17, 2019


  • The common law definition of a fiduciary is one who has the obligation to act for another with “total trust, good faith, and honesty.”
  • The Employee Retirement Income Security Act (the definition used by the Department of Labor) defines a fiduciary as one who acts solely in the interest of the beneficiaries of a plan, acts with “care, skill, prudence, and diligence,” diversifies the investments of the plan, and adheres to any documents governing the plan.
  • The SEC has stated that a fiduciary “must eliminate, or at least disclose, all conflicts of interest.”
    (Forbes Magazine)

In short, a registered investment adviser is, for the most part, legally obligated to do what is in the best interest of their clients, at all times.

Case in point, the SEC recently conducted a sweep to determine which registered investment advisers that had broker dealer relationships were allowing their reps to sell load-share mutual funds for which the reps or the adviser received 12b-1 fees. The reason being, if an adviser has a relationship with a broker dealer, more than likely the adviser has access to no load funds. In those situations where the adviser does not have access to no-load mutual funds or there are load-bearing funds with a better track record, the adviser should be discounting the advisory fee by the amount of the trails being received by the adviser and its reps. Although the prospect of receiving trails on top of the asset management fee may seem attractive, and although not currently a violation of any SEC or State Statute, it can be deemed a violation of the adviser’s fiduciary duty and be grounds for regulatory action.

Another common area of concern for the regulators are those firms that are dually registered as both broker dealers and investment advisers. In situations such as this, the registrant may think that financially, the best course of action would be to place the more aggressive, active trading clients on the broker dealer side and those clients who have more conservative, buy and hold strategy on the investment adviser side. This will result in regulatory action including a fine and a restitution order. Although the broker dealer community has yet to be defined as a fiduciary, the regulators will hold the registered investment adviser accountable for allowing this type of business conduct.

The moral of this story is that registered investment advisers always, always, always have to put the client’s interest ahead of their own. Any financial gain acquired from making decisions on the best interest of the adviser will usually result in regulatory actions that will easily negate any profits earned from not putting the client’s needs ahead of the adviser’s.

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Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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