Is Your Financial Advisor A Fiduciary?

Many of you would have at some point or the other heard someone saying, “It is their fiduciary responsibility to declare any conflict of interest”. However, have you ever wondered what being a fiduciary actually means and how this can impact your investment strategy and portfolio returns? The simplest definition says that a fiduciary is an individual or an organisation who manages assets on behalf of another person or entity. It refers to the relationship of trust between an entity/individual and the client. Someone who is a fiduciary is ethically and legally obliged to act in the best interest of his/her client. In theory, this should minimize conflicts of interest and make a financial advisor more trustworthy.

In the aftermath of the global financial crisis, there has been a general mistrust between investment advisors and clients. Many people have questioned whether their advisor is acting in their best interest or is solely motivated by commissions. While the tide has definitely changed with individual investors placing more faith and trust in their advisors, a lot more can be done to further strengthen this relationship. Advisors must act as fiduciaries to their clients and imbibe the following:

Always act in the best interest of their client – this means that as a fiduciary, the advisor must always put the clients’ interests before their own, seeking the best prices and terms for the client.

Act in good faith and provide all relevant facts to clients – when engaging with clients, the advisor has a responsibility to provide the client with all relevant facts and details so that the client can make informed investment decisions.

Avoid conflicts of interest and disclose any potential conflicts of interest to clients – there is always a probability that conflicts of interest might arise between the advisor and the client. Ideally, the advisor should actively avoid any conflict of interest. If one does come up, he/she should immediately disclose the same to the client.

Do their best to ensure the advice they provide is accurate and thorough – while it is not humanly possible to always provide the most accurate information, it is important that the advisor should strive to maintain accuracy and depth in the information that he/she is providing the client.

Avoid using a client’s assets to benefit themselves, such as by purchasing securities for their own account before buying them for a client – this is a very important point. When advising clients on their investment strategy, the advisor must give the right of execution to the client.

The relationship between a client and an advisor is built on a bedrock of trust. By following the highest ethical standards an advisor can become a trusted partner to his/her clients and cement his reputation as a fiduciary.

In Depth

Videos

Start-Up

Planet

Is Your Financial Advisor A Fiduciary?

Tags