Fiduciary Obligations and Down Markets


I was speaking with a client the other day and they inadvertently referred to me as their “broker.” It cannot be emphasized enough: there is a world of difference between a broker and an advisor, even though much of the American investing public is aware of neither the distinction nor the difference.

  1. Imagine if I was being paid by the mutual fund companies into which I invest your money.

  2. Imagine that you were not aware of this arrangement, and certainly not of its details.

  3. Imagine that I had no obligation to tell you of the arrangement.

  4. Imagine that I had better or less expensive ideas of where to invest your money but had no obligation to act on those ideas, and I could pick inferior ideas that paid me more.

  5. Imagine that I created a portfolio for you that was not sufficiently diversified because some elements of a diversified portfolio compensated me less than others.

  6. Imagine that I had lost confidence in an investment, or felt that it no longer met your needs, but was reluctant or even unwilling to sell that investment because I was being paid to keep that investment.

  7. Or imagine that you wanted to sell an investment but I argued and persuaded against it because I was secretly being paid by another party for you to keep it.

Then I would be a broker, a middleman neither fully on your side or on the brokerage’s side for whom I work. On some matters I might be more in your camp, and on others I might be more in my brokerage’s camp. And you might often not know when I was where.

As an advisor, legally registered as such with the Securities & Exchange Commission, I must:

  1. Put your interests before New Capital’s at all times

  2. Disclose to you any conflicts of interest that I may have (most especially if I am being paid to recommend an investment to you)

  3. Prudently diversify your accounts

As the market encounters turbulence and people wonder if the long bull market in both stocks and bonds is passing, I cannot guarantee you that I have any ability to predict the market’s next movements. But I can guarantee you that I am an advisor, and offer you the obligations listed above. Hopefully, and especially in a volatile market, you would agree that those obligations are in themselves enormously valuable.

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