There are six factors that highlight key differences between independent advisors and brokers. These factors are listed below and discussed in detail on this page.
Fiduciary vs. Suitability
Black’s Law Dictionary describes a fiduciary relationship as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.”
In light of news about fraud, Ponzi schemes, lack of regulatory oversight, and the like in recent times, we want to make crystal clear how True North Advisors is legally required to serve our clients. What are the differences between our responsibilities as a Registered Investment Advisor ( “Advisor”), and those of a Registered Representative who is usually employed by a broker-dealer, i.e. a “broker” or “stock broker”?
There are subtle, but important differences between an Advisor’s and a Broker’s legal responsibility to clients. True North believes it is important for you to understand these differences. Why is the distinction important? The differing levels of legal responsibility have a direct bearing on what investments are recommended for your account(s) and how your portfolio is constructed.
As a Registered Investment Advisor under the Securities Act of 1940, True North Advisors is required to act as a fiduciary, that is, to put your interests above our own and declare any conflicts of interest that may arise. You can be assured that the portfolios we construct to meet your goals put your interests above all else. Our only thought when selecting investment products for your portfolio is how those investments are going to help you get to your financial objectives.
A broker, or Registered Representative, is required only to recommend investments that are “suitable” for you. In other words, a broker can legally put his own interest above yours when recommending investments “suitable” for the situation.
Advice vs. Transactions
Because brokers are paid by commissions on products sold, there is a subtle pressure to do transactions. Also, brokerage firms are usually investment product manufacturers who see their broker/employees as the prime distribution channel to sell their products. RIAs are paid an advisory fee, usually a percent of assets under their care. RIAs have no incentive to sell any product or to do trading in client accounts.
Transparency vs. Disclosure
Brokers usually follow all the rules for legal disclosures. You probably have been inundated with disclosures printed in small-type in highly formal and hard-to-read language from brokers about your investments. That’s become the standard for “disclosure.” At True North Advisors, we are committed to the higher standard of transparency. To the extent you are interested, we will fully share details about any aspect of our service offering, relationship with investment product providers, and how we make money. We provide clients with annual fee reports with complete transparency on the fees we charge. We do not take any commissions or “marketing incentives” from investment product providers.
Registered Investment Advisor vs. Investment/Financial Advisor
Over the past 10 to 15 years, many brokers have co-opted the title of “Investment Advisor” or “Financial Advisor” without accepting the fiduciary duty of a Registered Investment Advisor as described in the Securities Act of 1940. Rather, they adhere to the “suitability” doctrine. In fact, some very large, household-name brokerages have been lobbying Congress hard to avoid having a fiduciary level of accountability imposed on their stock brokers. Not surprisingly, it is not uncommon to find the “suitable” investments at large brokerages to be those that pay the broker and his employer the highest fee.
Financial firms continue to blur the line between broker-dealer and investment advisor by inventing and bundling new products. Because of the diversity of these products and services, investors sometimes fail to distinguish between brokers and investment advisors along the lines that federal regulators define. A large part of the problems in late 2008 have been because of this disregard for a fiduciary premise and a drive to maximize profits.
3rd Party vs. In-House Custody
Another safeguard that True North employs is the use of third party custodians of your assets. Your accounts are placed at a major custodian, like Schwab Institutional or TD Ameritrade and are not held in-house at True North. We have limited power over the funds held by these third party custodians. That power is limited to buying and selling securities on your behalf, moving funds between your accounts, and having funds sent directly to you via your address of record or like-registered account.
This practice was not employed by the firms involved in the highly-publicized fraud or Ponzi schemes. Typically, the parties involved in these fraudulent schemes had direct control of the vast majority of assets under management and direct control of most of the information about those assets (meaning generation of all statements, audit information, and periodic update materials). Those practices enabled the embezzlement and fraud. By using a third party custodian, clients are able to double check account information provided by True North against statement provided by custodians, as a check-and-balance.
Ethics vs. Law
Even though more stringent regulations are under consideration by our government, unethical behavior cannot be legislated out of existence. We believe the best way to earn your trust is through sound advice and an open relationship. No matter what is decided in the courts or government institutions regarding regulation, at True North Advisors we gladly accept our fiduciary responsibility to our clients. The ethics and values we have for how we serve clients is higher than any legal standard. At the core of our values is the concept of fiduciary duty and pledge to you that we will never compromise these values.