Excellent albeit disturbing piece in the Wall Street Journal this past weekend (Jan 18-19, 2025), by Jason Zweig, The Intelligent Investor. Sadly, it appears custodians don’t have the same fiduciary duty to their clients as financial advisors do, leading to potential conflicts of interest. In the article, Your Advisor Is Under Pressure To Take Another Bite of Your Money. Jason Zweig says:
“After all my years of writing about investing, I had no idea what was going on behind the scenes. I doubt you did either.”
Types of Financial Advisors
There are two types of financial advisors, Registered Reps and Registered Investment Advisors (RIAs).
FINRA (Financial Industry Regulatory Authority) regulates Registered Reps, who must uphold a duty of suitability with clients. Registered reps typically work for a brokerage company that trade stocks and bonds in house.
Registered Investment Advisors (RIAs) have a fiduciary duty to their clients to act in their best interest at all times. The Securities and Exchange Commission (SEC) regulates RIAs. Most RIAs custody their assets at third party firms such as Fidelity, Schwab, Pershing and a few more. They trade using those third-party custodians.
The Custodial Pressure
What is happening? Some custodians are requiring of RIAs to invest in captive investments provided by the custodian that may NOT be suitable or have the best returns for their clients. For example, Fidelity may receive more fee income if an RIA buys Fidelity’s own Mutual Funds or ETFs.
In the article, one advisor was required to generate $90,000 more in fee income for the custodian Fidelity Investments. The advisor was given seven ways to generate additional fees for Fidelity including by increasing investments in their proprietary funds. This situation creates a conflict of interest for the advisor.
As a client of an RIA, you never want them to have to compromise their fiduciary duty. Advisors have a duty to put the client’s best interests above their own. A conflict of interest arises when custodians create such requirements. Your advisor also needs to provide you with analysis of why they are recommending the investments, provided best practices in trading and be transparent in their fees or costs. The best way for any advisor to handle additional requirements from custodians is to pass along a set fee. In the article that fee was $375.00 annually to the client. By being transparent about fee requirements, your advisor can trade and invest in your best interests without any potential conflicts of interest.
In Conclusion
Ask your financial advisor if any of their investment recommendations are being influenced by your custodian. Find out what other ways you can pay for additional custodial fees or if you can change custodians to eliminate any pressure placed on your financial advisor.
If you are considering looking for a financial advisor, check out my blog post Choosing a Financial Advisor.
Disclaimer: The information provided on this blog is for general informational purposes only. All content is based on personal experiences, research, and opinions. While I strive to ensure the accuracy and reliability of the information shared, I cannot guarantee that it is up-to-date, complete, or applicable to every situation.