RIAs bear a fiduciary responsibility to act in loyalty, fairness, and good faith to their clients. Part of this responsibility includes freeing oneself from potential conflicts of interest and disclosing those that do exist. Such conflicts can arise from a number of circumstances, including:
- The advisor’s ownership interest in a business
- Relationships the advisor has with business partners
- Compensation the advisor receives from fund managers
- Insurance products the advisor offers
- Affiliations with financial institutions
RIAs must provide disinterested advice that is in their clients’ best interests. Any personal stake the RIA has in an investment decision can consciously or unconsciously violate that directive.
Identifying potential conflicts
A thorough review of your company’s business dealings and relationships may expose conflicts of interest. Every individual, from senior management to junior advisors, must fall within the scope of this review.
When conflicts emerge, how you deal with them is another matter worth considering. The actions you take in such a situation will depend upon the specific circumstances at play. Generally speaking, a considered response will include:
- Notifying the individual with the conflict as soon as possible
- Deciding if that individual can continue to execute the trade or engage in related trading and advisor activity
- Transferring the account to a conflict-free advisor, or
- If the advisor decides to proceed despite the conflict, immediately notifying the client
RIAs are not expected to be completely free from conflicts. They must, however, properly disclose those conflicts to their clients and regulatory officials. If you have questions about what types of information you need to disclose, consult with someone who is well-versed in the legal obligations of RIAs.
Free yourself from legal worries
Whether you are just starting to build your own RIA or work with an established firm, addressing conflicts of interest will remain an ongoing concern. By implementing sound policies and procedures designed to avoid and expose actual and potential conflicts of interest, you can help your business avoid lawsuits, regulatory investigations and other costly legal problems.