A fiduciary is an individual or company that is given the legal duty and capacity to act on the behalf of another for matters requiring a high level of trust and accountability. Investment advisors, as well as trust companies can serve as fiduciaries once they are registered with the Securities and Exchange Commission (SEC).
The SEC holds registered advisers to a higher standard of practice in comparison to brokers who are regulated by the Financial Industry Regulatory Authority (FINRA). SEC-registered advisers must comply with the SEC’s “custody rule” as it was put into effect to protect investors from the possibility of theft or misuse of their assets.
Fiduciary Requirements
When searching for a fiduciary who operates in compliance with the SEC’s regulations, verify if they are respecting the following requirements.
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Using qualified custodians. Apart for limited exceptions, an investment adviser must maintain client assets with a qualified custodian such as a bank or a registered broker. The custodian would maintain a client’s funds in an account listed under their name and follow this protocol for each client. Alternatively, the custodian would pool the funds of clients that belong to the same investment advisor, into the same account bearing the name of the advisor who serves as their agent or trustee.
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Client notification. Once an advisor opens a custodial account for a client, they must advise them of the custodian's name, address and how the funds or securities are being held and any changes thereafter. As well, the advisor must notify their clients to always compare the account statement received from the advisor with those sent by the custodian.
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Provide account statements. An investment advisor must reasonably ensure that custodians are actually sending statements to clients, on a minimum quarterly basis. This allows the client to compare the statements sent from both the adviser and custodian and report any inconsistencies in transactions or advisory fees.
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Subject to surprise audits. In the case of advisors who have custody of client assets, they are required to sign an agreement with an independent public accountant for the latter to review all custodial assets on a surprise basis each year.
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Additional measures for related qualified custodians. Once an investment advisor also serves as the qualified custodian, or uses an affiliated custodian, the advisor must obtain a annual report from the custodian that is independently verified by a public accountant. This report provides an opinion on the custodian’s procedures and effectiveness of safekeeping client funds and securities.
Client-Focused Fiduciaries
In addition to the strict requirements that fiduciaries follow, a key difference with a fiduciary is that they will charge clients on a per-fee basis, rather than a commission structure that many brokers resort to. The fee-based billing method is seen as a more client-centric approach for advisors and companies that above all, value long-term client satisfaction.
Note that some fiduciaries also maintain the FINRA designation so it is important to ask an investment advisor or trust company what regulatory certification(s) do they hold and what is their fee structure.
About Caldwell Trust Company
Caldwell Trust Company is an independent trust company with offices in Venice and Sarasota, Florida. Established in 1993, the firm currently manages over $850 million in assets for clients throughout the United States. The company offers a full range of fiduciary services to individuals, including services as trustee, custodian, investment adviser, financial manager and personal representative. Additionally, Caldwell manages 401(k) and 403(b) qualified retirement plans for employers.
