More than four years ago, the partners of Balentine formed our firm with the goal of managing our clients’ investments the way we wanted our own money managed: free of conflict, proprietary products and undisclosed fees. In short, we wanted to serve as fiduciaries for clients and steward their assets in the most transparent manner possible. As investment industry veteran Charley Ellis puts it, “Wall Street has too often confused the economics of the business with the values of the profession”. As a result, one of the biggest challenges we face is differentiating Balentine in a sea of sameness. While many of these differentiating characteristics are important to us, they are not always obvious to the general public.
How can we distinguish who we are in an overwhelming financial landscape that comprises money managers, investment consultants, broker-dealers, bankers and RIAs? There are a number of important facets, but the single most important discriminating factor is the standard of care to which an advisor is held.
In the investment world, there are two primary standard of care levels: suitability and fiduciary. Suitability is the standard of care to which Registered Representatives, governed by the Financial Industry Regulatory Authority (“FINRA”) are held. According to Section 2111 of the FINRA Manual, the standard of care of suitability is met when a registered rep has “a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
In contrast, an SEC Registered Investment Advisor (“RIA”) such as Balentine is held to a Fiduciary standard of care and therefore is legally required to always act in the client’s best interest. Those interests must be placed above the RIA’s own, and advisors must disclose material facts to the client, including conflicts, fees and business affiliations. Advisors with more than $100 million in assets are regulated by the Securities and Exchange Commission under the Investment Advisers Act of 1940 and held to a fiduciary standard of care.
What this means is that an advisor that is held to a suitability standard of care is not required to put the client’s interests first; instead, he or she only has to do what is suitable for clients. A prime example of this comes with proprietary products. Under a suitability standard of care, a broker-dealer can sell his or her firm’s products, even though a competing product may be less expensive, and he is not required to disclose this information to the client. With a fiduciary standard, an advisor would be required to make the best decision for the client, not himself or herself, and to properly disclose all the fees the client would pay.
The landscape, however, is even more complicated now with the advent of dually registered and hybrid investors. Dually registered or hybrid advisors are registered with both FINRA and the SEC and can earn both fees and commissions. Having multiple oversight channels and standards of care can make it difficult to know when the advisor is acting as a fiduciary and when he or she is only held to a suitability standard of care. This is a relatively new trend and one that the SEC has been reviewing carefully over the past several years.
To help navigate these tricky terms, there are several questions you can ask a potential advisor:
- Are you held to a fiduciary standard of care?
- Are you fee-only or do you receive any other forms of compensation, such as commissions?
- Will there be any proprietary products in my portfolio? If so, will those be disclosed to me prior to purchase?
This is a subject about which Balentine is very passionate. Indeed, we have covered in other forums such as the CFA’s Conference Proceedings Quarterly and at the CEO Summit. Though it can be difficult to discern, we believe this should be one of the most important factors an investor weighs when choosing an investment advisor. If you have any more questions about the differences between these standards of care, please contact us.