Written by: RIA in a Box
When an individual is in need of help with managing their finances and investments, there are a myriad of options of professional guidance to choose from. The financial services providers one might look to engage typically can be an insurance agent, a registered representative, who is commonly referred to as stock broker, an estate planning attorney, an accountant, or perhaps last but certainly not least a registered investment adviser (RIA) firm. In addition, some investment advisers are licensed to sell additional financial products such as insurance or are dually registered as a registered representative.
An Investment Adviser’s Fiduciary Duty
RIA firms are generally regulated by the Investment Advisers Act of 1940 and relevant state statutes which stipulate that an investment adviser must act in the best interest of a client. The Advisers Act bounds an investment adviser to a fiduciary duty, that they clearly know their client and have provided complete disclosure. Sections of Rule 206 of the Act specifically prohibit an RIA firm from using deceptive or manipulative tactics and from conducting fraudulent business activities. Above all else, an investment adviser must demonstrate trustworthiness and allegiance to his or her clients.
One way to document a thorough understanding of a client’s financial needs, risk tolerance, and the goals they are looking to achieve is to create an Investment Policy Statement (IPS) for each adviser and client relationship. An IPS can be developed to model the advisory relationship after obtaining an overall picture of a client’s finances, risks and objectives. Such a policy is a great way to create a defined outline and plan to manage a client’s particular financial situation. The policy can serve as a compass to provide direction, alignment and as a road map to consistently ensure that the adviser and client are on the same page. An IPS may also help to document that the adviser knows their client and can act in the best interest in creating client portfolio allocations and selecting investments.
Establishing an RIA Compliance Program
To ensure an RIA firm is upholding the duties under the adviser act, the SEC and state(s) generally require every RIA firm to establish a compliance program which includes adhering to written policies and procedures. Each advisory firm needs to tailor a compliance program designed for the particular advisory practice and the types of services being provided. Processes need to be in place to address any potential conflicts and avoid violations of the Advisers Act and other relevant regulations.
An essential element of fully disclosing all facets of an advisory business and any potential conflicts of interests is through the requirement that all investment advisory firms maintain and deliver the Form ADV Part 2A brochure to existing and prospective clients. The Form ADV brochure must be written in plain English and should contain pertinent information related to the firm’s investment analysis, fee structure, background and credentials of each associated investment adviser representative (IAR) as well as outside business activities being conducted. It is very prudent to consistently review these documents and regular updates to correct any inconsistencies.
Fiduciary Duty Does Not Apply to all in the Industry
This fiduciary duty is not something that all financial services professionals need to stand by. There are other financial services professionals such as a registered representative (RR) of a broker-dealer (BD) that merely need to make suitable investment recommendations for their clients. Once investment suitability is met, the investment may be appropriate for a client, however; there may be other variables that may not serve the client’s best interests, such as having higher fees than similar investments and added compensation incentives to position certain products such as monetary bonuses or other rewards.
This particular topic has been continuously debated for many years and specifically recently the Securities and Exchange Commission (SEC) has revisited a universal fiduciary standard for registered investment advisers and Financial Industry Regulatory Authority (FINRA) member registered representatives, as well as rhetoric from Congress, the Department of Labor (DOL) and even the President of the United States. has touched on the topic in various forums.
The average investor may not be aware of the fiduciary duty an investment adviser is legally bound to. Anyone seeking to implore services from a financial professional should conduct in depth research pertaining to the disclosure or complaint history of the individual and their firm. Common sense can quite possibly dictate that working with a professional that is held to a strict level of moral conduct and ethics could be a more appropriate fit.
Although this still remains a hot topic of conversation throughout the financial advisor industry, currently it is solely an investment adviser that must comply with their fiduciary duty. It is essential that in managing an RIA firm that the principal(s), investment adviser representatives and the Chief Compliance Officer ensure that all aspects related to the RIA firm such as advertising, disclosure brochures, investment processes, trading practices, etc. are all conforming to representations of the business being conducted and not deceiving or manipulative. All of this all ultimately instills the inherent duty to act as a fiduciary. An investment adviser is held to the highest standard in the financial advisor industry and always must exhibit the nature of goodwill when working with clients.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.
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