The Responsibilities of a Wealth Manager

As we’ve noted before, it seems like everyone in the financial world is now calling himself or herself a wealth manager or at least a financial advisor, even if the roles these people fill are wildly different. One reason this is so important is because there are rules, instituted and enforced by the SEC, regarding the obligations of people who offer various forms of financial advice. These are based less on what these advisors call themselves than on the precise nature of the advice they provide.

People who perform overall, big-picture financial planning–not just simple investment advice–for their clients on a fee-only basis are called registered investment advisors. They must be registered with the SEC and, most important, must act as a fiduciary. A fiduciary is defined as someone who is required to act in your best financial interests, rather than in their own interest. Someone who had pledged to act as a fiduciary would, for example, never try to sell you a mutual fund just because of the commissions the person would receive for doing so.

Anyone who draws up financial plans–including, of course, all true wealth managers–must act as a fiduciary. People who offer pieces of that plan, like a broker who is selling you stocks or an insurance agent selling you a policy, are not required to act in a fiduciary role. But a wealth manager, who oversees all aspects of your financial life, definitely is.

What Is a Fiduciary?

The SEC publishes rules that help define what that fiduciary relationship is supposed to consist of. As I said, the primary obligation of fiduciaries is to always act in the best interests of the client. As part of that, they are required to disclose all potential conflicts of interest, such as financial relationships with other firms. They are required to identify any illiquid securities that their clients may be holding. And they must develop, maintain and abide by a code of ethics.

Why does this matter? If you’ve found a wealth manager whom you can trust, shouldn’t you just assume that he or she will act in your best interests? Yes, but that’s not really the issue at this time. It’s not the RIAs, the wealth managers, who have created controversy over the fiduciary relationship.

The Brokers’ Role

The problem is that there has been increasing confusion over the roles played by other financial professionals, who have been trying to claim more and more of a role in people’s financial lives without ever assuming that fiduciary role.

According to the SEC, brokers are now allowed to call themselves “financial advisors” or “financial consultants.” But they’re still not allowed to give you any advice other than that specifically about purchasing stocks. There’s even a specific rule called the Merrill Lynch rule that allows brokers to offer fee-based accounts–though not comprehensive advice–without becoming RIAs.

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