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January 2021

Understanding the Concept of Fiduciary Duty


Written by
 
W. Gregory Richardson, CFA

President, Principal, Portfolio Manager

Key Points:

  • A Registered Investment Advisor is required to serve clients’ best interests at all times and above all else.
  • This fiduciary standard of care provides the highest level of legal protection.
  • Mitchell Sinkler & Starr is held to this high standard, but not all investment professionals are.

Unless you live full-time in the world of financial services, you may sometimes feel that you need a translator to understand those of us who do. There’s no shortage of specialized terminology. Among the phrases you will often encounter, one that’s definitely worth knowing is “fiduciary duty.” It’s the key to understanding a major difference between investment firms that might at first glance seem the same. So what is a fiduciary duty?

In short, firms with a fiduciary duty are legally required to work in the best of interests of their clients, not their own.

Said another way, they cannot put their interests as a firm ahead of those of their customers. While it might seem this would be the foundation of any advisory relationship, there are, in fact, many instances in our industry when this is not the case.

A fiduciary relationship is generally considered to provide the highest standard of customer care under law. It requires full and fair disclosure of all fees, any conflicts of interest, and the material facts of any investment recommendation. As an SEC-Registered Investment Advisor, Mitchell Sinkler & Starr is required to meet this high standard.

On the other hand, in the eyes of the SEC, non-fiduciary advisers are essentially salespeople. They have no legal requirement to consider whether the investment products they recommend are in their clients’ best interest. Instead, many of these professionals are held to a so-called “suitability” standard: Is the advice they provide suitable for the client’s needs.

From a legal standpoint, this broad and open-ended suitability requirement rarely protects the investor.

For example, some advisers may only be licensed to sell certain insurance, annuity, and mutual fund products. These may be considered suitable, but result in high investment fees that are clearly not in the clients’ best interests. In addition, the adviser may be paid a commission on the sale of these products – a financial incentive creating an undeniable conflict of interest.

As an SEC-Registered Investment Advisor, Mitchell Sinkler & Starr is required to eliminate any such conflicts.

Furthermore, because our Firm is paid based on the market value of our client accounts, our interests fundamentally align. We prosper when you prosper.

Mitchell Sinkler & Starr’s philosophy and approach have always directly reflected our fiduciary duty. We are paid only by our clients and have no other sources of revenue, such as commissions. This way of doing business has benefitted the individuals, families, and organizations we serve for the past 50 years, and we fully expect it will continue to do so for the next 50.