A retail investor establishes an account with a financial services firm to receive continuous portfolio management and asset allocation advice. The firm charges an ongoing quarterly fee calculated as a percentage of total assets under management rather than charging transaction-based commissions for each order executed. Under federal securities regulations, which entity classification and primary standard of care apply to this firm?
- Investment adviser, operating under a fiduciary duty to act in the best interest of the client.Answer
- BBroker-dealer acting as an agent, charging a mark-up on transactions executed from its own inventory.
- CBroker-dealer acting as a principal, charging a commission for matching buyers and sellers in the secondary market.
- DSelf-Regulatory Organization (SRO), exercising federal authority to criminally prosecute non-compliant retail clients.
Answer
Investment adviser, operating under a fiduciary duty to act in the best interest of the client.
Firms engaged in the business of providing continuous investment advice for compensation based on a percentage of assets under management fall under the legal definition of an investment adviser. Investment advisers are bound by a legal fiduciary duty requiring them to act in the best interest of their clients.
Step-by-Step Solution
Key Concept
Regulatory distinction between Investment Advisers (fee-based advice, fiduciary duty) and Broker-Dealers (commission/markup execution, agency/principal capacities).