January 18, 2015


As an Investment Advisor (IA), Weatherhelm Capital Management LLC  (“Weatherhelm”) adheres to the Fiduciary Standard of care laid out in the Section 206 of the Investment Advisers Act of 1940.

The Fiduciary Standard requires IAs to serve a client’s best interests with the intent to eliminate, or at least to expose, all potential conflicts of interest which might incline an investment advisor—consciously or unconsciously—to render advice which is not in the best interest of the IA’s clients.

As a fiduciary, Weatherhelm is always mindful of the “Prudent Man Rule.”  This rule, based on the common law and stemming from the 1830 Massachusetts court formulation laid out in  Harvard College v. Amorydirects fiduciaries “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

Weatherhelm’s choices when rendering advice are therefore governed by the question: “What would a prudent, well-informed actor choose given a duty of diligence and a full and thorough consideration of material facts?”

Given two substantially similar products, Weatherhelm must always choose the best one for the client, regardless of any incentive or benefit potentially available to the firm itself.  This may seem obvious to the average person, but as in many things related to the financial services industry, obvious is not always the way things are structured.

Investment Advisor Fiduciary Standard vs. Broker/Dealer Suitability Standard

The Fiduciary Standard is significantly different from the standard of care offered by traditional stockbroker Registered Representatives (RR’s) working for Broker/Dealer firms.  This difference is not often well understood by the investing public and is based on a loophole in the law which allows RR’s to define the advice they give as “incidental” to their business.

Section 202(a)(11)(C) of the Investment Advisers Act of 1940 exempts from the definition of an Investment Adviser (and therefore the associated Fiduciary Standard) “any broker or dealer whose performance of such [advisory] services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor.” (Emphasis supplied)

At Weatherhelm, advice is never “incidental” to our business.  We are paid by and for our advice alone.  We do not sell products to earn commissions.

In Release 34-51523; the SEC determined that RR’s of Broker/Dealers are “not to be deemed investment advisors” and therefore are not subject to the Fiduciary Standards of IAs when recommending investments to clients.  RRs affiliated with a Broker/Dealer are only required to recommend securities that are deemed “suitable” for non-institutional clients. The FINRA Suitability Standard requires that an RR make reasonable efforts to obtain information concerning a client’s:

  1. Financial status
  2. Tax status
  3. Investment objectives
  4. Risk tolerance
  5. Other information used or considered to be reasonable

And then to only sell those products which are “suitable for at least some investors” under the circumstances.

To sum up, an RR must make a suitable recommendation but is not required to make the best recommendation for the client.  As a result, many inferior products with high fees and expenses but big commissions are sold to unwitting investors.

But wait… it gets even more messy.

As explained on our page describing the Big Bank Financial Supermarket Model of providing financial services, RR’s of a Broker/Dealer are often dually registered so that they may also provide investment advice through an affiliated IA.  This allows the Big Banks to charge “wrap fees” on advisory accounts in addition to charging commissions on regular brokerage accounts with the same client.  As Investment Adviser Representatives (IARs),  the dually registered  financial advisor is held to the Fiduciary Standard when providing advice on advisory accounts and supposed to clearly communicate to their clients whether they are brokering a suitable security as a RR or providing investment advice as an IAR and therefore acting as a fiduciary.  In practice, these lines may often be blurry to the client.

Our question is: “Why not always act as a fiduciary and chose the best available product for the client?”

Ask your advisor if they are an independent fiduciary.  If the answer is anything but an clear an unequivocal “Yes!” maybe you need a new advisor.