Winston Wealth Navigator > Vol. 1 > Understanding Fiduciaries: Are Investment Advisors Included?
At the beginning of any new process, the very first step is learning the proper terms or the lingo. Whether it’s an unfamiliar job, your child’s favorite sport, or a different type of cuisine you’re striving to whip up in the kitchen, grasping the basic language is step one. The same concept applies to your journey to financial strength. A solid understanding of all the terminology equips you with the fundamental knowledge to have a productive conversation. So today, we’re sharing an overview of the roles and responsibilities of fiduciaries and investment advisers.
What is a Fiduciary?
A fiduciary is someone who handles money or property for someone else. By law, a fiduciary is obligated to manage your money and property for your benefit, not theirs. In simple terms, they are making decisions in your best interest, not for their personal gain. They have a responsibility to you to preserve your trust. When dealing with someone who is a fiduciary, you can feel confident that there won’t be aggressive sales tactics, misleading acts with the hopes of a potential bonus, or any conflicts of interest to worry about.
Let’s look at an example: Ms. Baker works for ABC Company, which sells fixed annuities. If Ms. Baker sells her client, Jane, a fixed annuity, Ms. Baker will make a commission. However, this fixed annuity would not be a proper fit for Jane’s financial needs. So, although Ms. Baker could make money from the sale to Jane, she does not suggest it. This sale is not in Jane’s best interest. So, Ms. Baker places Jane’s interests before her own.
Examples of Fiduciaries
You probably encounter people who hold fiduciary responsibilities all the time and perhaps never realized it before. Among the most common fiduciary relationships are between:
- Attorneys and clients
- Doctors and patients
- Investment Advisers and clients
- Condominium board members
- Guardians and wards (i.e., a minor)
- Trustees and beneficiaries
- Board of Directors and a company
- Accountants and clients
Fiduciary Responsibilities
A fiduciary has four main duties:
- Act in your best interest: Their duty is to make decisions that are best for you, not for themselves.
- Manage money and property carefully: They have important financial responsibilities, such as paying bills, overseeing bank accounts, and covering your needs. They might also handle investments, taxes, rent, unpaid debts, and insurance for you if requested.
- Keep money and property separate: It’s crucial to never mix your money or property with theirs or anyone else’s. Confusing records could lead to trouble with government agencies, like Adult Protective Services programs, and the police.
- Keep good records: They must maintain accurate and complete records of your money and property to avoid legal consequences.
How do you Appoint Someone as a Fiduciary?
If you’re having health challenges and experiencing difficulty making sound decisions, it may be time to appoint someone as your fiduciary. This may occur if you are battling an illness or you’ve reached a certain age and cognitive impairment has set in. You can appoint a family member or friend to be your fiduciary to help manage your money or property. This can be done through a power of attorney (bonus term!).
A power of attorney is written authorization to represent or act on another’s behalf in private affairs, business, or legal matters. A lawyer will charge a fee to create this document. Once whoever you appoint agrees to take on this role and act on your behalf, they must follow what you agree upon and outline in the power of attorney.
As mentioned above, the investment adviser and client relationship is one that holds fiduciary responsibility. If you’re reading this newsletter, you’ve heard the term investment adviser at least once. Let’s explore the role in more detail.
What is an Investment Adviser?
An investment adviser is an individual or company paid to offer advice about securities to clients. A security (bonus term!) is an investment, such as a stock or bond. Other names you can see for people who hold the role of investment adviser include:
- Asset manager
- Investment counselor
- Portfolio manager
How Can an Investment Adviser Help Me?
Investment advisers offer individually customized investment advice, manage portfolios, and may provide financial planning or brokerage services if they have the proper licenses. Brokerage services can include buying or selling stocks or bonds. The licenses to sell stocks and bonds include Series 7, Series 6, and Series 63 licenses.
Who Oversees Investment Advisers?
Investment advisers are regulated by the Securities and Exchange Commission (SEC) or a state securities regulator. The SEC oversees advisers managing $110 million or more in client assets, while state regulators handle those managing up to $100 million. Advisers with less than $100 million must register with the state regulator, where they have their main office.
How to Determine which Investment Adviser is the Right Person to Work With?
There are many investment advisers who can partner with you on your journey to financial success. Finding a person who you want to work with for an extended period of time is essential. A few factors to consider include:
Connection
Money and values are deeply linked and very personal. Working with someone who understands your financial and life philosophies is important. Ask yourself:
- Do I feel comfortable being honest with the person sitting across the table?
- Does this person understand my goals?
- Is this a person I want to work with for many years?
Credentials
There are ways to confirm an investment adviser’s credentials beyond their LinkedIn profile and website. The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization that oversees member brokerage firms and exchange markets. Established in 2007, FINRA is dedicated to protecting investors and safeguarding market integrity. If you have questions about an individual investment adviser, FINRA and other credible organizations offer research tools. If you’d like to confirm an investment adviser’s credentials or have inquiries, you can use the following resources:
- FINRA BrokerCheck
- Call FINRA at 1-800-289-9999
- The U.S. Securities and Exchange Commission Action Lookup-Individuals (SALI)
- Investment Adviser Public Disclosure Database
Experience
When meeting someone for the first time to discuss finances, it is within your right to ask the questions:
- Are you a fiduciary? (Do not assume all representatives hold fiduciary responsibility. They may not! So equip yourself with the necessary knowledge and ask the right questions.)
- What is your title?
- What are the types of clients you work with? (For example, if your goal is college savings, check if the investment adviser has expertise in helping parents fund their children’s education. Did they achieve success in creating those savings?)
The Winston Wealth Advisor Way
David B. Winston, Executive Wealth Advisor, brings more than 30 years of wealth management experience to the table. David and his team look forward to starting a conversation with you to discuss your unique situation and help you build a tailor-made plan around your financial goals. Winston Wealth Advisors continues to help hundreds of clients and their families work toward the goal of building a prosperous future.
References:
https://www.nasdaq.com/articles/what-is-a-private-investment
https://www.investopedia.com/terms/h/hedgefund.asp
https://www.investopedia.com/terms/v/venturecapital.asp
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
David B. Winston
Executive Wealth Advisor
David B. Winston is the Executive Wealth Advisor of Winston Wealth Advisors. For more than 30 years, David and his team have helped hundreds of families throughout the United States prepare for and enjoy their retirement years. David moved to Texas in 1983 after receiving his bachelor’s degree from the University of Missouri-Columbia. (Series 6, Series 62, Series 63, Series 65, Series 26, SIE) held by LPL Financial.
Email: david@winstonwealthadvisors.com
