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This may come as a shock, but not all advisors are legally required to act in your best interest. In fact, many of the largest players are set up as Broker-Dealers, in which the advisors owe no fiduciary duty to their clients.
Investment advisors can be broken into two groups: Broker-Dealers (BDs) and Registered Investment Advisors (RIAs). Both types of firms generally offer similar services, but they vary greatly in terms of the level of care provided to clients: RIAs must act as fiduciaries for their clients (put client interests ahead of their own), while BDs have no such requirement.
This seeming oversight is a result of federal securities laws. When these laws were enacted, Congress drew a distinction between Registered Investment Advisors, who are regulated as advisors under the Investment Advisors Act of 1940, and Broker Dealers, whose agents are regulated as salespeople under the Securities Exchange Act of 1934.
This is a huge distinction. If you’re in the market for advisory services, do you want to work with someone who is trained and regulated as an advisor? Or someone who is trained and regulated as a salesperson?
Depending on which route you go – Broker-Dealer or Registered Investment Advisor, your advisor will be subject to different legal standards when they offer advisory services.
If you choose to work with an RIA (like us), then you can rest assured that the products and strategies recommended are in YOUR best interest, and your best interest only. A fiduciary duty means that your advisor is legally required to put your interests ahead of theirs in each and every decision they make.
But that all goes out the window with Broker-Dealers. Since agents of BDs are regulated as salespeople, they owe a much lower standard of care to clients. This is known as the suitability standard, and simply requires that transactions be “suitable” for the client’s needs.
Unfortunately, suitability is a vague concept in finance, and so this requirement carries very little weight. It basically just means that a transaction can’t be completely unsuitable for the client.
In order to help you better understand the differences between working with an RIA (fiduciary) versus a BD (non-fiduciary) it might help to walk through a few example situations you may encounter.
With RIAs, all conflicts of interest must be disclosed up front, or the advisor can be held liable. With BDs, many conflicts of interest are permissible without having to be disclosed to the client. In some cases BDs don’t even have to disclose the fees they’re receiving from outside sources tied to the products they recommend.
RIAs have a duty to help you minimize investment related expenses paid outside the firm. They can’t stick you in a more expensive fund just because they’ll get additional compensation on the back end from recommending that particular fund. With BDs, this is totally permissible.
RIAs cannot purchase a security for the firm or advisor accounts before buying the same security for client accounts (if intended). In this case, the RIA must uphold a “best execution” standard, which involves buying for client accounts FIRST, in order to achieve the lowest execution price for the client. In contrast, BDs can trade their own accounts ahead of client accounts, and can even take the other side (trade against) client accounts.
It should be noted that the Securities and Exchange Commission (SEC) recently enacted new standards of conduct rules which took effect in September 2019. In an attempt to improve the standard of care provided by BDs, the SEC created Regulation Best Interest (Reg BI). This only applies to BDs, and it requires them to act in the best interest of their clients.
While this is a step in the right direction, BDs fought back against this additional oversight, and as a result, the Reg BI standard only applies to the moment a transaction is recommended. In other words, clients will receive something close to a fiduciary standard, but only for brief moments in time.
In contrast, the fiduciary duty maintained by RIAs applies throughout an advisor’s entire relationship with its clients. The new updates are a move in the right direction, but advisory clients will still find themselves in much better hands working with an RIA.
As a fee-only Registered Investment Advisor, we have a fiduciary duty to you, our client. We put your interests ahead of ours, and offer a transparent pricing structure that aligns us toward the same goal. As a result, you know that we sit squarely in your corner.
Sigma Point Capital, LLC (“SPC”) is a Registered Investment Advisor. All information provided herein is for educational purposes only and does not constitute investment, legal or tax advice, an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party’s views.
Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
All examples are hypothetical and designed solely to convey information about our investment philosophy and strategies. Investing involves a great deal of risk including the loss of some or all of your investment. Past performance is not an indication or guarantee of future performance and Sigma Point Capital does not warrant or guarantee any minimum level of investment performance. No representation is being made that any SPC client account will or is likely to achieve profits or losses similar to those shown in the hypothetical back tested performance.
Hypothetical performance shown on the Sigma Point Capital website (the “Site”) is backtested and does not represent the performance of any account managed by Sigma Point Capital. The hypothetical performance depicted was achieved by means of the retroactive application of investment strategies that were designed with the benefit of hindsight.
Backtested performance is NOT an indicator of future actual results. Hypothetical results have inherent limitations, particularly that the performance results do not reflect the results of actual trading using client assets. Additional limitations of backtested performance include, but are not limited to, the effects of material economic and market factors on the decision-making process, and the ability for the security selection methodology to be adjusted until past returns are maximized.
The performance of any account managed by Sigma Point Capital will differ from the backtested performance shown on the Site for a variety of reasons, including without limitation the following:
Performance results have been compiled solely by Sigma Point Capital, LLC and have not been independently verified.
Sigma Point Capital relies on third-party data sources for portions of its data. The information derived from these sources is believed to be accurate, but no warranties or representations are made with respect to its accuracy or completeness.
Neither Sigma Point Capital nor any third-party data provider are responsible for any damages or losses arising from any use of this information.
In order to help existing and prospective clients understand the performance characteristics of the SPC Tactical Investment Models, backtested performance on the Site is shown in relation to three benchmarks: The S&P 500 Index, The U.S. Aggregate Bond Index, and a 60/40 blend of those two indexes (benchmarks are shown using Exchange-Traded Funds which track each index).
Sigma Point Capital Tactical Models use a combination of equity and fixed-income ETFs to achieve their results; therefore, these benchmarks provide a reasonable example of the performance that one would achieve from a buy-and-hold approach using a similar set of securities.
SPY represents the SPDR S&P 500 ETF. It is an exchange-traded fund designed to track the performance of the S&P 500 Index. It does not represent the index itself.
AGG represents the iShares Core U.S. Aggregate Bond ETF. It is an exchange-traded fund designed to track the performance of the Bloomberg Barclays U.S. Aggregate Bond Index. It does not represent the index itself. The inception date for AGG is 9-22-2003. As a result, in our analysis and backtested performance, we use price data for VBMFX (the Vanguard Total Bond Market Index) as a proxy for AGG price data for all dates prior to 10-01-2003, at which point we switch to using actual AGG price data.
"60/40 Stocks/Bonds" refers to a hypothetical portfolio that would have kept 60% of its assets invested in SPY - the SPDR S&P 500 ETF and 40% of its assets invested in AGG - the iShares Core U.S. Aggregate Bond ETF.
SIGMA POINT CAPITAL, LLC MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION ON THE SITE.
This document and the information found on the Site do not constitute a complete description of SPC’s investment services. For personalized investment advice, please Contact Us.