The Significance of a Fiduciary Relationship
In our opinion, a fiduciary relationship between adviser and client is essential. If you have an account at a large brokerage firm, ask your adviser if he acts in a fiduciary capacity. If the broker/adviser holds a series 7 license, the answer is no. By having a fiduciary relationship with the adviser, the client is assured that all conflicts of interest are disclosed.
We offer a “Fiduciary Pledge” to every one of our clients when they sign their Investment Advisory Agreement. Here is what is says:
I, the undersigned, pledge to exercise my best efforts always to act in good faith and in the best interests of my client, ____________________, and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interests that could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all compensation I will receive as a result of the products and services I provide you, and all fees I pay to others for referring you to me for the products and services I offer you. I recognize that you rely upon me, and are compensating me, for trustworthy advice; therefore, I acknowledge that this pledge covers all the products and services provided in this engagement.
The client and adviser both sign this pledge. We take this obligation very seriously. We will never be compensated by anyone other than our clients. This is the essence of being “fee-only”.
You would think that this type of pledge to clients would be essential for all participants in the financial services industry, but it is not. Insurance companies and brokerage firms sell products, many times from their own inventory. It is impossible for a financial adviser to offer totally objective advice when compensation is coming from the products that are sold.
At Terrapin Capital Management, we feel very comfortable signing this pledge because it reflects a high regard for our fiduciary responsibility and removes any decisions that might place sales or commissions above the best interests of our clients.
