What Is Fiduciary Responsibility and Why Should It Be Important To You?


Lost in the shuffle of President Obama’s recently proposed regulatory overhaul is the proposal to hold all brokers to the same fiduciary standard as registered investment advisors.

First, a little background.  A quick check of Wikipedia finds this definition of fiduciary duty as ‘… the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the ‘principal’): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.  The word itself comes originally from the Latin fides, meaning faith, and fiducia, trust’.

Under current regulations, registered investment advisors, like our firm, are required to accept fiduciary responsibility in all our actions.  Brokers, like those found in most of the large brokerage firms aren’t held to the same high standard.  The only requirement they have is to recommend investments that are ‘suitable’ for the client. 

Sounds like the same thing, right?  While the difference in responsibility between the Investment Advisor and Broker might seem like semantics, it can mean a real difference in practice.  

For example, your advisor at XYZ Brokerage has determined, correctly, that a mutual fund that invests in Large Cap companies is a suitable investment given your risk tolerance, age and circumstances.  Among her many fund choices, your advisor at XYZ has available to her Fund A and Fund B.  Fund A is a proprietary fund run by the firm and Fund B is a fund run by an independent mutual fund company and both have similar performance results.  Fund A, though successful and clearly suitable, carries a higher expense ratio and higher turnover than Fund B but also pays the advisor more.  Both of the funds are ‘suitable’ for your portfolio and the advisor would be well within the rules to recommend Fund A over Fund B.  

If your advisor worked for a Registered Investment Advisor (RIA), they would have a fiduciary responsibility to recommend a fund that is not only suitable, but that is in your overall best interest.  That means that despite the fact that they would make more money recommending Fund A, they are obligated to recommend Fund B since it carries lower overall expenses.

If adopted, this proposal could fundamentally change the way the brokerage business operates.  Firms would be required to change their compensation structure to de-emphasize proprietary products and would most likely cause them to reduce expenses and improve the performance of those same proprietary products in order to make them more compatible with the fiduciary standard.  The result would be better protection for the consumer, something the Obama administration is pushing aggressively for as part of this overhaul.

This article was written to illustrate one aspect of President Obama’s regulatory overhaul proposal and to highlight some of the differences between advisors that work for Investment Advisors and those that work for brokerage firms.   It is in no way intended to imply that advisors at the brokerage firms are anything but ethical.  I truly believe that the vast majority of people in the financial services industry, whether they are technically subject to fiduciary responsibility or not, act in the best interest of their clients on a day in and day out basis.

If you’d like more information on fiduciary responsibility or if you’d like to schedule a portfolio review to ensure that your current advisor is adhering to the standard, drop us an email at info@rtjfinancial.com or call our office at (310) 587-3370.


What Is Tax-Efficient Investing?

Have you ever gone to visit your CPA at tax time and found out, at the very last minute that you’ve got a huge tax bill due to gains in your portfolio?  The most likely cause is that your financial advisor didn’t take into account the tax consequences of their portfolio moves, generating a large taxable gain.

The are two ways to combat this problem:  regular tax planning and tax-efficient investing.  Tax planning should be an ongoing conversation with your CPA to avoid having any nasty surprises come tax time.

Tax-efficient investing involves handling your investments to maximize the AFTER-TAX return.  It’s not how much you made, but how much you kept after taxes.  The following are some ways to reduce the tax burden on your accounts:

Hold Onto Your Investments

When you hold an investment less than a year, any gain is taxed just like your regular income.  By holding the investment for at least a year before selling, you reduce the tax rate to (currently ) 15%.  Timing the sale of specific investments to lower that tax rate is critical.

“Harvest” Your Losses

In the second half of the year, as you re-balance your portfolio, you should look to sell positions that have lost money so that loss can offset gains you may have elsewhere.  The idea is “harvest” losses equal to your gains in order to eliminate the taxes due.

Put The Right Investments In The Right Accounts

Use tax-efficient investments, like Exchange Traded Funds (ETF’s) in your taxable accounts and put the higher-tax investments in retirement accounts like IRA’s and 401(k)’s.  The overall effect is that you have, hopefully, reduced your overall tax burden.

On a final note, let me remind you that this blog entry is merely to illustrate the concept of tax-efficient investing and should not be construed to be giving tax advice.  Before undertaking any investment program, consult your wealth manager and CPA as each circumstance is unique.