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The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails by Steven M. Sears

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Fiduciary Standard

Never forget that stockbrokers work on commissions. They are salesmen. They work for the sales divisions of banks. They are increasingly given names, to mask the fact that they are salesmen. Unlike RIAs, who have a fiduciary duty to clients that dictates that they act in the best interest of their clients, stockbrokers operate under different regulatory rules. This is an important distinction. It is not a fatal distinction, but it is widely misunderstood. The SEC issued a January 2011 report on RIAs and stockbrokers that recommended the fiduciary standard be imposed on stockbrokers. Naturally, this is an incredibly controversial issue, and nothing has happened. In the report, the SEC said that the fiduciary standard applies to an investment advisor’s entire relationship with clients, and even prospective clients. Advisors have an obligation to disclose all material facts, and an obligation to use “reasonable care to avoid misleading’” clients, and anyone they want as clients. The fiduciary standard imposes the “duty of loyalty and care” that requires an advisor to serve the best interests of clients. The SEC report says this duty obligates advisors not to subordinate the clients’ interests to their own interests. Advisors must make a reasonable investigation to determine that recommendations are not based on inaccurate or incomplete information.

When advisors select or recommend something to clients, they must reveal payment deals and business relationships. ...

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