Whether you acquire a wealth manager, is it through your financial institution or a referral? Even more important, how much do you actually know about them? For many investors, it’s not nearly enough. This, ultimately, can be dangerous. If you have hired someone to look after your investments, you need to know that person is going to act in your best interests. In other words, you need to know if your advisor is going to act as a fiduciary.
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What is a fiduciary?
The straightforward definition is that a fiduciary is a person who holds a legal or ethical relationship of trust with another person.
What is fiduciary duty?
Fiduciary duty is when an investment manager acts in your best interests — taking care of your money and your investments and putting your interests ahead of their own.
As the Canadian Securities Administrators (CSA) explains, acting in your client’s best interest means that the fiduciary needs to make sure:
- Client interests are paramount
- Conflicts of interest are avoided
- Clients are not exploited
- Clients are provided with full disclosure
- Services are performed reasonably prudently
The Canadian courts have determined five interrelated factors that determine whether an advisor is in a fiduciary relationship with a client. These are, according to the CSA:
- “The degree of vulnerability of the client due to such things as age or lack of language skills, investment knowledge, education or experience in the stock market.”
- “The degree of trust and confidence that a client reposes in the advisor and the extent to which the advisor accepts that trust.”
- “Whether there is a history of relying on the advisor’s judgment and advice and whether the advisor holds him or herself out as having special skills and knowledge upon which the client can rely.”
- “The extent to which the advisor has power or discretion over the client’s account or investments.”
- Professional Rules or Codes of Conduct: “Such rules and codes help to establish the duties of the advisor and the standards to which the advisor will be held.”
Think about this. You go to the doctor when you’re sick and expect that doctor will do their best to get you well. In other words, that doctor should have your best interests at heart. It should be the same with your investment manager.
Why should you care about fiduciary duty?
It is extremely important that your wealth manager has a fiduciary duty because it could harm your long-term financial goals if they don’t. You may lose out on the best investments for you. You may also lose out because the investment products purchased for your portfolio won’t necessarily benefit you. They will likely benefit (i.e. compensate) your advisor, however.
Many in the financial industry feel that fiduciary duty should be mandatory for investment managers. Wealth Management Canada falls into this camp. Unfortunately, in Canada, fiduciary duty is not mandatory. Sadly, not every investment advisor will act in the best interests of their clients. That means you need to do your research before you decide to hire them. In this research, you need to ensure that:
- They have the right credentials. Do you know which securities licence, registration, or professional certifications the wealth manager has?
- They’re recommending investments/products that will benefit you, not them.
- Your manager is investing their wealth the same way they are investing yours.
- You understand the fee structure and your manager discloses the fees that they’re charging.
At Wealth Management Canada we know the importance of transparency and fiduciary duty. The investment companies we have identified understand and implement fiduciary duty in their practices. They all put their clients’ interests first — before their own, before their firm.
Fiduciary duty is an important aspect to consider when choosing an investment manager. After all, you want someone to take care of your money, not take your money.