Fiduciary Duty for Portfolio and Risk Management

Fiduciary Duty: Where Portfolio and Risk Management Meet

As a fiduciary, managing client assets requires handling risk appropriately, not seeking to eliminate it altogether.

Published by Motley Fool Wealth Management Originally posted on Tue, Jul 26, 2022 Last updated on July 25, 2023

read time 5 min read

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You’ve probably seen movies or read stories portraying slick Wall Street stockbrokers who work on commissions, incentivized to move their clients into and out of different positions unnecessarily, all the while lining their pockets with little or no regard for the long-term health of their clients’ portfolios.

You might wonder, “Is that how the investment management world works?”

If we set aside the Hollywood-glamorized version of these stories, unfortunately, the fact remains that there are financial professionals who may put their clients into commission-based accounts, which might not be best suited for all investors.

The answer? A fiduciary

Fortunately, the Securities and Exchange Commission (SEC) adopted rules designed to enhance brokers’ standard of conduct beyond the previous “suitability” obligations. These rules require brokers to act in the best interest of investors. That means brokers have a legal obligation to place their customers’ financial interests ahead of their own and disclose any conflicts of interest.

Registered Investment Advisers, like Fool Wealth, have always been subject to the strictest standard of care or, in legal speak, a fiduciary duty. More good news for you as a consumer: You can determine who you want to work with and what fee structure is best for you.

All of these rules and regulations are designed to protect consumers like you from being taken advantage of when it comes to investing your hard-earned money toward your long-term goals.

We're serious about our fiduciary duty 

Of course, when it comes to applying our fiduciary duty to managing your investments, it might surprise you to hear that “putting your financial interest first” doesn’t mean attempting to eliminate all risk in your portfolio. Let us explain…

We firmly believe that our role as a fiduciary is to manage your risk, which means seeking to ensure the risk you take is part of a calculated plan that’s appropriate for your particular financial needs, goals, and time horizon and clearly communicating to you the risks that you are taking and how that may impact your portfolio. Those factors can vary widely from client to client.

The idea that a wealth manager with a fiduciary responsibility can’t build an appropriate investment portfolio based largely on stocks because stocks are inherently “too risky” is a dangerous misconception.

Every asset class includes risk. For example:

  • The risk of keeping your long-term savings in cash is that your purchasing power is likely to erode over time due to inflation. 

  • The risk of bonds is that interest rates or inflation will decrease the real return on your payout or that the company, municipality, or nation offering those bonds defaults.
  • The risk in stocks is volatility. The whims of the market can vary widely from day to day. Companies fail. Industries falter. The overall value of a portfolio can fluctuate dramatically.

We believe investing in individual stocks is a time-tested path to building long-term wealth

This is why we intentionally built Motley Fool Wealth Management with stock-picking as our core investment solution and what we believe to be a competitive advantage.

Our team of in-house portfolio managers is solely responsible for finding, evaluating, vetting, and ultimately selecting the companies that power our proprietary portfolio strategies.

While the value of stocks will naturally fluctuate, we believe that adhering to a long-term, buy-and-hold strategy significantly mitigates the risk around stock investing.

Our duty of care guides appropriate asset allocation and periodic rebalancing 

As fiduciaries, we seek to ensure that our clients’ assets are allocated appropriatelyacross a mix of asset classes (including bonds and international stocks) as well as among different categories of U.S. stocks based on, among other things, market capitalization.

We also periodically rebalance to ensure that our client accounts reflect our latest asset allocation advice and, where appropriate, reallocate client assets to reflect changing life circumstances. In all cases, we strive to protect the capital you need in the short term while continuing to potentially grow your wealth for the long haul.

We let our clients know that stock investing can be a bumpy ride compared to other asset classes, and we often recommend (where we believe appropriate) an allocation to bonds to potentially smooth out the ride. If a client’s portfolio delivers the result they hoped for, then they are generally rewarded for taking that ride. Of course, there is no guarantee of success (there are no guarantees with any asset class, as we mentioned above, and any responsible investment manager should tell you the same), but our team is committed to working in our clients’ best interest every step of the journey.

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