As you may have noticed, we at Index Funds Advisors have changed our tagline from "matching people with portfolios" to "fiduciaries for wealth." While the former is a fair description of what we do at the beginning of a client relationship, the latter goes to the essence of who we are and how we relate to our clients for the entire duration of the relationship. According to Wikipedia, a fiduciary (from Latin fiduciarius, meaning "[holding] in trust;" from fides, meaning "faith," and fiducia, meaning "trust") is a legal or ethical relationship of trust between two or more parties. Typically, a fiduciary prudently takes care of money for another person.
IFA acts in a fiduciary capacity to our clients who invest not only their money but their confidence, good faith, reliance, and trust in IFA with the expectation of receiving aid, advice and protection from the many pitfalls of the investment world. As a fiduciary, IFA is required to act at all times for the sole benefit and interest of our clients to whom we owe a duty of undivided loyalty and utmost good faith. We are prohibited from engaging in any activity that conflicts with the interest of any client, and we strive to fulfill our obligations. We also strive to avoid misleading clients and provide full and fair disclosure of all material facts to our clients and prospective clients. Generally, facts are "material" if a reasonable investor would consider them to be important. We strive to eliminate, or at least disclose, all conflicts of interest that might incline us — consciously or unconsciously — to render advice that is not disinterested.
It is important to understand that many actors on the investment stage are not fiduciaries. A broker who is not acting as your investment adviser is not held to a fiduciary standard. Instead, he is held to a "suitability" standard which is far more lenient. For example, a broker could purchase "C class" shares of a mutual fund that pay him a 1% annual trailing commission. For an adviser acting as a fiduciary, this would be a conflict of interest and thus forbidden. The following is excerpted from the client agreement for one of the largest brokerage firms in the world: "When we act as your broker-dealer, we do not enter into a fiduciary relationship with you. Absent special circumstances, we are not held to the same legal standards that apply when providing investment advisory services. Our legal obligations to disclose detailed information to you about the nature and scope of our business, personnel, fees, conflicts between our interests and your interests, and other matters are more limited than when we are providing investment advisory services to you." Elsewhere in the agreement is an admonishment that the broker may trade with you for their own account and may earn a profit on those trades without obtaining your consent or disclosing the profit earned on the trades. We hope, by now, that you have become educated to the point of realizing that signing such an agreement is clearly against your own best interests.
In closing, we hope that if you are an existing IFA client, you are satisfied with our efforts to be your investment fiduciary, and we would appreciate any feedback on how we may improve upon them. If you are a prospective IFA client, we hope that we have convinced you of the vital importance of having a reliable fiduciary who will always sit on the same side of the table with you.