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Fiduciary Standard

If you read nothing more from this website, I hope you will take the time to the read the following. This information will help educate yourself about the financial services industry, and hopefully allow you to make a smarter decision regarding who you choose to help manage your finances. Not taking the time to understand the following concepts could potentially prove to be detrimental to your financial goals, and ultimately, the lifestyle you lead in retirement.

As a member of the financial services industry, what I am about to say does not paint a pretty picture of the industry in which I serve. And as unfortunate as this case may be, if you are an individual seeking financial advice it is important you understand that much of what passes today as investment management and financial planning is absolute garbage. You could list many causes for this regrettable situation, but one of the primary reasons relates to the confusion the general public has regarding the difference between a “financial advisor” working for a Broker Dealer versus a Registered Investment Advisor.

This confusion stems from a rule formally adopted by the Securities and Exchange Commission (SEC) in 2005 which came to be known as “rule 202” or the “Merrill Lynch” rule. This rule allowed stockbrokers to act as "financial advisors" and to charge fees based on a percent of the client’s assets. Prior to this rule, only Investment Advisors regulated under the Investment Advisors Act of 1940 could offer this service to their clients.

So what’s the big deal you ask? The heart of the matter relates to the fiduciary standard. A fiduciary is someone who manages money for the benefit of another and is bound by law to place the interests of the client ahead of the interests of the fiduciary. The Investment Advisors Act of 1940 requires Investment Advisors to act as fiduciaries toward their clients.

You would think that the fiduciary standard would apply to any person offering financial advice, including broker dealers and their representatives. Sorry! Broker Dealers and their agents are regulated under the Securities and Exchange Act of 1934, and require only that the Broker Dealer follow a “suitability” standard. The suitability standard is vague at best, and does not require the “financial advisor” of the Broker Dealer to place the best interests of the client ahead of their own, even if the financial advisor may know that this advice may not be in the best interest of the client. In fact, even if the financial advisor wanted to act as a fiduciary toward their client, the advisor may not be able to do so because of the contract between the financial advisor and Broker Dealer. This contract may require the financial advisor to place the interests of the Broker Dealer ahead of the client.

As a result, the imposition of the Merrill Lynch rule has allowed agents (formerly known as stockbrokers) of the Broker Dealer to call themselves “account executives”, "financial advisors", "wealth managers", or other similar titles that imply they are making financial decisions based on their clients’ best interest. The sad truth is that financial advisors of the Broker Dealer have no legal obligation to act in the best interests of their clients.

As with any group of individuals, I do not like to generalize. I am sure there are many individuals in the Broker Dealer community who are reputable and provide good service to their clients. However, the conflict of interest inherent within the Broker Dealer business model has lead to disastrous results for many individuals trying to achieve long term financial security. If you choose to use an advisor employed by a Broker Dealer……….caveat emptor.

Diablo Investment Advisors, LLC is a Registered Investment Advisor in the state of California. DIA is subject to the fiduciary standard set forth by the Investment Advisors Act of 1940, and will always place the trust and confidence of its clients above all else.  


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DIA takes very seriously the fiduciary responsibility to act with good faith and integrity on your behalf. DIA has a strong sense of loyalty to your interests, and every action we take reflects that allegiance.