Related topics

Being a Fiduciary Comes with Responsibilities to the Client

March 10, 2019 GMT

By Stephen Kelley, CSA

As a Registered Investment Adviser (RIA) with a Series 65 securities license, we hold a fiduciary duty to you. This means that we are legally bound to put your interests above those of anyone else, including ourselves.

Now you might reasonably think that anyone offering financial advice or services to clients is required to be a fiduciary. Sadly, if you thought that, you’d be wrong. Some estimates claim that only 15 percent of advisors have a fiduciary duty to their clients. The Paladin Registry puts the number even lower, estimating that just one in 12 (8.3 percent) advisors have a fiduciary responsibility.


For the most part, stockbrokers (also called “Registered Representatives,” “Account Executives,” “Financial Advisors,” or “Wealth Managers”) are not fiduciaries, even though they are allowed to portray themselves as full-service investment advisors. If your stockbroker/registered representative/account executive/financial advisor/wealth manager holds a series seven securities license, then it’s probable that they aren’t a fiduciary.

This was made amply clear in the movie, “The Wolf of Wall Street,” a biopic about Jordan Belfort, a stockbroker who made his fortune selling junk stocks and bonds to middle-class investors: in other words, by cheating them. Much of it was perfectly legal. The SEC went after Belfort’s company, Stratton Oakmont, for nearly a decade before it was able to shut it down. The point being that even in the face of egregious wrongdoing, theft, fraud and a virtual sea of drugs and blatant hedonism, the securities laws in this country are so loose that it took billions in theft and a decade of suspected and known fraud to step in and stop the abuse. And this movie was based on a true story.

That’s why a fiduciary duty is so important to a client. Being a fiduciary is a legal distinction. A Registered Investment Advisor (RIA) or Investment Advisor Representative (IAR) who holds a Series 65 securities license, subject to the Investment Advisers Act of 1940, is a fiduciary. The legal investment advising standards that govern a non-fiduciary stockbroker and a fiduciary Registered Investment Advisor are very different.

A Registered Investment Advisor is legally required to follow the “trust” standard -- the highest known in law -- which requires it to place the interests of its clients ahead of its own and fulfill critical fiduciary duties of trust and confidence. Under the fiduciary trust standard, a Registered Investment Advisor must provide its “best advice” to a client. A non-fiduciary stockbroker (like the coveted Series 7 of “The Wolf of Wall Street”) follows only the “suitability” standard, which doesn’t require a stockbroker to place the interests of his clients ahead of its own. Under the non-fiduciary suitability standard, a stockbroker need provide only “suitable advice” to his clients -- even if the stockbroker knows that the advice is not the best advice for the client.


Here’s how that could play out.

Stockbroker Sam has two securities that would provide a risk-return profile that has been deemed “suitable” for the client. Now, security A is a pretty well-known company that has a good outlook going forward, but security B is being pushed by the company for whom Sam works, call it Oakton Strattmont. Oakton, you see, was the underwriter for the IPO, owns a huge amount of the stock, and pushing it drives up the price and brings the company owners huge payouts. Now both of these securities are “suitable” for the client from a risk profile and target returns, but one is clearly being driven, not by what is good for the client, but for the company selling it. Yet these are both entirely acceptable sales per the Series 7 suitability standard.

Further, even if a non-fiduciary stockbroker wanted to follow the trust standard of law and become a fiduciary to his clients, it cannot do so because of the contract it has with its broker-dealer. Such contracts require the stockbroker to place the interests of the broker-dealer before the interests of the stockbroker’s clients. A stockbroker, then, owes fiduciary duties only to its broker-dealer -- not to its investment clients. A Registered Investment Advisor owes fiduciary duties only to its investment clients because it doesn’t have a broker-dealer.

The critical difference between a stockbroker and a Registered Investment Advisor is that the RIA is subject to the high fiduciary, legal standard when providing investment advising services while the stockbroker is not. This difference could have a major impact on your investment portfolio and hence your retirement lifestyle.

Full disclosure (a component of the trust standard) requires that I disclose that I am biased in this area. One of the reasons I never became a Series 6 or Series 7 representative is because I don’t want an outside party telling me what I should be doing with my clients. In other words, if I truly believe it’s in your best interest to go one way, and my broker-dealer was insisting, for “compliance purposes,” that I provide you another solution and downplay or dismiss what I believe is the best answer for you, I want to have the freedom to do what is in your best interest without fear of losing my livelihood.

Series 6 and Series 7 representatives are often barred from doing that by their broker-dealers. Imagine a business model that requires you to do something that is not in your clients’ best interest?

It’s an easy one to remember. Just ask the person with whom you are working if they are bound by a standard of trust or a standard of suitability.

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, he serves Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die,” which deals with the problem unknown lifespans create for retirement planning. It and his other books are available on .

He can be heard every weekend on the “Free to Retire” radio show on WCAP and WFEA, and he conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at .