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Money Management: Is your investment manager acting in your best interests?

As an investor, how can you be sure that your investment manager is providing you the best advice in terms of how your assets are invested? Is this something you ever think about? It should be. The difference is significant.

Basically, there are two standards of care. One is the “Suitability Standard” and the other is the “Fiduciary Standard.

The Suitability Standard requires a manager to:

  • Know your client and their financial situation well enough to understand their financial needs; and
  • Recommend suitable investments based on the client’s financial needs.

The Fiduciary Standard requires a manager to:

  • Act solely in the client’s best interest;
  • Act with prudence; that is, with the skill, diligence and good judgment of a professional;
  • Do not mislead clients; provide full and fair disclosure of all important facts;
  • Avoid conflicts of interest; and
  • Fully disclose and fairly manage, in the client’s interest, unavoidable conflicts.

The Securities and Exchange Commission (SEC) requires that all Registered Investment Advisory Firms (RIAs) to adhere to the fiduciary standard. This means that your manager must act exclusively in your best interest, provide sound advice and invest your assets in a manner that is most beneficial relative to your needs. Also, other considerations include whether the fees are reasonable, whether the investments are adequately diversified and consistent with the governing documents for the portfolio, among others. Conflicts of interest must be avoided — meaning, RIAs cannot recommend financial instruments where the RIA receives compensation for the transaction.

Who must abide by the suitability standard? Brokerage firms, banks, insurance companies, financial planners, wealth managers and any others registered with the SEC as a Registered Investment Adviser. Those who are not registered with the SEC as a Registered Investment Adviser are not held to the fiduciary standard. This means that a non-fiduciary adviser may recommend investments that are generally appropriate for clients’ long-term investment needs even if other similar investments exist with better long-term performance and lower fees. The adviser is under no obligation to disclose these details to you — including the fact that some sales will generate higher commissions for him/her.

Under the suitability standard, investors may be harmed if they choose a financial adviser under a mistaken belief that the adviser is required to act in their best interest when that is not the case. They may receive advice that complies with the suitability standard but carries additional costs or risks without providing additional benefits — or they may fail to receive the on-going account oversight that they expected.

Many investors do not understand the different standards. Due to the vast array of financial titles in the investment industry, they are often uncertain as to who is giving the best advice, where there may be conflicts of interest, overall costs and a clear understanding of their performance versus an appropriate benchmark.

The fiduciary standard requires that client interests come first and client interests are the only interests that matters. Simple.

So, as an investor, understanding the suitability versus fiduciary standard is very important. Entrusting a firm to manage your assets is a major decision that requires homework. In addition to understanding a manager’s philosophy, experience and performance history (net of all fees), ask how the manager is compensated. Do you want your manager to act with the highest standard of care regarding your assets? If so, seek a manager who adheres to the fiduciary standard.

Marijoyce Ryan, CPP, is vice president of fiduciary services for Karpus Investment Management, an independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534 (585-586-4680).

About Marijoyce Ryan