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What is a Fiduciary?

Shearwater Capital is a Registered Investment Advisor (RIA) with the U.S. Securities and Exchange Commission (SEC). RIAs are governed by the Investment Advisers Act of 1940, which means that they are held to a fiduciary standard with respect to providing financial advice. The SEC definition of a fiduciary is as follows:

“Under the Advisers Act, an adviser is a fiduciary whose duty is to serve the best interests of its clients, which includes an obligation not to subrogate clients’ interests to its own. An adviser must deal fairly with clients and prospective clients, seek to avoid conflicts with its clients and, at a minimum, make full disclosure of any material conflict or potential conflict.”

To summarize, as a fiduciary, we have a moral and legal obligation to treat our clients fairly, to act in their best interests, to have a reasonable basis for financial advice, to avoid conflicts of interests when possible, and to fully disclose and fairly manage, in the client’s favor, unavoidable conflicts; in effect, to place our clients’ interests before our own.

We are not alone in serving as fiduciaries. Your attorney and your CPA are also considered fiduciaries. However, not everyone who might offer financial advice is a fiduciary. For example, stockbrokers and insurance agents are not considered fiduciaries, and are therefore not legally held to a fiduciary standard. They represent themselves or their company and have no legal responsibility to act in your best interest or to disclose conflicts of interest. They are not permitted to commit fraud or provide “unsuitable” recommendations, but suitability is broadly defined and is a weaker standard than the fiduciary standard. For example, your stockbroker can recommend a mutual fund that is suitable for you, and perhaps pays him a large commission, even if another fund might be better for you; whereas a fiduciary is required to recommend the financial instrument that he or she feels is the best one for you.

At Shearwater Capital, the fiduciary standard is woven into our practice and influences our every decision. Each client account is managed individually. All investment decisions are guided by your asset allocation strategy, which is based on your investment objectives, time horizon, risk preferences, and unique financial conditions. We are always open to discussing a change in your asset allocation strategy if your financial situation or investment objectives have changed. We manage our personal investment portfolios using the same approach that we use for our clients, adjusting for individual differences. We place our own trades last to avoid “front-running,” which is an attempt to drive up the price of a previously purchased security with a new order. As a fee-only advisor, we accept no commissions, sales charges or incentive fees that might reward us for buying a particular security. Our only compensation is from your investment management fees, which allows us to operate independently, in your best interests, without being beholden to any particular fund company.

When it comes to financial advice, there are many options, but it is clear that fiduciaries are held to a higher standard than non-fiduciaries. When possible, it is usually best to seek advice from professionals who are held to a fiduciary standard.

Please feel free to contact me at any time if you have any questions or comments.

Jeffrey J. Brown, MD CFA

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