Key Terms

For many decades. studies and surveys regularly show that the overwhelming majority of American investors do not know what a fiduciary is. Recent surveys show nothing has changed despite a lot of recent talk about fiduciary standards. When investors are asked if their advisor is a fiduciary, most answer with “I don’t know.” When it comes to finances, it is wise to deal with the facts. Many people, especially the non-investor, prefer to blissfully ignore the fundamental and inescapable fact that there is a better way than using a commission-based, off-Wall Street salesperson.

Fiduciary

A fiduciary relationship an individual places the utmost trust and confidence in another for the management and protection of money or property. The fiduciary has the legal duty to act solely in the best interest of the other person. The fiduciary must be loyal, use reasonable care, and avoid all conflicts of interest.

Fee

A fee is the non-discriminatory method of compensation used by professionals. There are only two types of fees. The first is time, which means a person pays for the time they used. The second is procedure, which means a person pays a set price for the procedure performed.

Trust

There are four elements to a trust-based relationship.

  1. Professional Relationship

  2. Good Judgement

  3. Expertise

  4. Consistency

The professional relationship is broken when the fiduciary crosses the line and becomes friends with the client. Friendship is a sales technique designed to maximize client retention. Professionals have empathy and compassion, but are focused on doing their job to the best of their abilities for their clients, without discrimination.

Investment Advisor

A true fiduciary-based investment advisor provides advice through a process that is based on facts and figures, and unemotional understanding of goals, objectives, strengths, and weaknesses of the client. The fiduciary investment advisor can only be paid on a fee basis for time or procedure performed.

Investment Manager

A true fiduciary-based investment manager provides management through a process that is based on facts and figures, and unemotional understanding of goals, objectives, strengths, and weaknesses of the client. The fiduciary investment manager can only be paid on a fee basis for time or procedure performed. The term “investment advisor” is commonly used interchangeably for advisor and manager.

Salesperson

A salesperson sells goods and services through persuasion. Sales techniques range from presenting facts and figures understandably to the highly confusing and obtuse with extreme emotional leverage primarily based on affinity. Salespeople spend most of their time as relationship managers and are not advisors or managers(1)(2).

Commission

If you buy or sell more and pay more, have more under management and pay more, or profit more and pay more, you are paying a commission. Commissions are discriminatory. Fiduciaries are never paid any form of commission.

Conflict of Interest

A conflict of interest is a legal term that describes a situation where the duty and obligation of a fiduciary was broken and exploited for personal financial or intangible benefit. A true fiduciary also avoids even the appearance of a conflict and makes a full disclosure of potential conflicts. Any form of commission compensation (buy, sell, manage, or profit) represents a blatant conflict of interest.

Assets Under Management

Assets Under Management (AUM) is a commission scheme where compensation to the investment (relationship) advisor/manager increases that is commonly misrepresented as a fee.

Relationship Manager

A relationship manager is a term that is used to describe the primary duties and responsibilities of an investment advisor representative (person) who delegates the management of money to a third (turnkey) asset management platform (TAMP), when being paid an ongoing commission based on a scheme known as assets under management (AUM). Relationship managers rarely charge for their time as they are focused on keeping clients happy and their money with the TAMP. A relationship manager is not a fiduciary.

Agent

An agent is a person with the authority to represent another person or entity for a service or product. Insurance and real estate agents are most commonly paid on a commission basis and are not fiduciaries.

Broker

A broker puts buyers and sellers together. Brokers are most commonly paid on a commission basis and are not fiduciaries.

Dealer

A dealer sells from their inventory and buys to sell later at a profit. Dealers are most commonly paid on a commission basis and are not fiduciaries.

Financial Planner

The Financial Planner designation is one of the most fraudulent, misused, and misunderstood professions. A true fiduciary-based financial planner exclusively designs and writes a financial plan for a fee. A fake financial planner is a person who uses financial planning as a sales process to sell insurance, investments, loans. Fake financial planners are not fiduciaries.


(1) Source: CNBC, Monday, April 25, 2016 - More financial advisors are learning the ABCs of TAMPS - “A sharply growing number of financial advisors are outsourcing their asset and investment management to third parties, often referred to as “turnkey asset management programs,” or TAMPs.” The article offers insight with this statement: “It became very difficult to focus on too many things,” Wander said. “Not having to concentrate on investment selection and management allows me to be more focused on financial planning.”

(2) Source: The Race to Scalability 2018, Advisor Research on Investment Management Trends, FlexShares, page 3 - “The proportion of such advisors has gradually increased to 43%, up from 41% in the 2016 survey and 40% in 2014. On average, advisors who turn to external investment managers, now delegate 57% of their assets under management, compared with 53% of those assets in 2016.”