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Jul 20

Following a Fiduciary Standard of Care

by Dick Schlote

Meeting new people or reconnecting with acquaintances often leads to the question of where I’m working these days.  I reply, “I work for Rockbridge Investment Management, which is a ‘Registered Investment Advisor’ (RIA).”  With that response I usually get a nod and a change of subjects.  Most don’t understand what an RIA is, or how we differ from a broker, bank, insurance company, or anyone else with whom one can invest.

Perhaps the most important difference is that the RIA must follow a fiduciary standard of care.  A fiduciary must, at all times, act for the sole benefit and interest of the client.  It is a relationship of loyalty, trust and confidence.  Many advisors or financial consultants only have to follow a suitability standard.  The investments they sell or recommend only have to be suitable, but not necessarily in the client’s best interest.  This means that the RIA is expected to manage the client’s investments based on what is best for the client, not necessarily what stock, fund, product, or transaction might be suitable, often generating the most income or commission for the advisor.

A fiduciary duty is the highest standard of care.  A fiduciary is expected to be loyal to the person/client and must not put his personal interests before the client’s.  Our clients will never be called to make a purchase or sale of a product to take advantage of some potential gain, market situation, or “hot” product as is often the case with brokers and other financial product salespersons.  These products may be suitable, but not necessarily advantageous to the client.

Another difference at Rockbridge is our dedication to determining an appropriate client asset allocation and sticking with it.  This is most difficult for individuals who manage their own accounts especially over the past few years when various markets have been so volatile.  Their tendency is to sell when the market has gone down and buy when the market has gone back up.  It has also been difficult for those with accounts managed by brokers, whose income is dependent on sales of securities or funds; volatility and uncertainty is a great sales tool for them.  We don’t try to pick stocks or actively managed mutual funds, selling one and buying another in an attempt to increase returns, usually a futile and expensive activity.  Our concentration is on monitoring the allocation and rebalancing when appropriate.  A close friend (and client) jokingly (I think) accuses us of doing nothing for him, especially when he calls and asks why we didn’t sell or buy with market changes.  My response is that doing “nothing” was the best thing to do instead of buying or selling based on the emotion of the moment, and often at the wrong time.

Another friend, Bob, manages his own rollover retirement account.  He uses Fidelity funds and talks with an employee there.  He pays nothing for the accounts (except for the annual mutual fund expenses inherent in all mutual funds) but gets no advice either.  The Fidelity employee explains the funds to him when asked and makes changes as instructed.  Bob has no set plan or design for his investments.  He may do OK, and may not, but has no real knowledge of how he is doing compared to generally accepted benchmarks.  If he were using an RIA he would have a specific investment strategy and someone to talk with about his cash flow needs, his tax situation, his minimum distributions, his investments, and his investment goals.  And he wouldn’t be worried about market conditions and interest rate changes.

Perhaps the most important question investors should ask any financial professional is “How do you invest your own money?”  Our employees’ investments are managed exactly the same as those of our clients.

It appears that these volatile market and economic conditions may continue.  We suggest that our clients call or visit us to discuss their investments at any time.  It is important that the client be comfortable with their investment advisor and their important investments.

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