Brokers and investment advisers are legally obligated to know their client.
That doesn't mean they know how a client takes their coffee, or what they really think of the GOAT. It means that they understand the client's goals, financial situation, and comfort levels when it comes to risk. Knowing this stuff lets the pros make good investment decisions on behalf of the client, and lets them offer the right advice.
Like...you have a 26-year-old who just inherited a million bucks from old Uncle Larry. They're just finishing their doctoral dissertation in Computer Science. There will be a line around the block of employers courting them. They have no debt, and really don't want to own much of anything other than a nice computer. So that million bucks likely gets steered into lots of small company investments which likely pay no or small dividends. And are expected to grow a lot over the next decades.
However, if you knew that this client was scared of his own shadow, always thought that the sky was falling, and just didn't want stock market volatility anywhere in his life...well, then maybe you'd put half of his portfolio in bonds or some safer, saner equity investment that paid a fat dividend.
Knowing your client changes...everything (sometimes).
Related or Semi-related Video
Finance: What does it mean to have fiduc...51 Views
Finance a la Shmoop! What does it mean to have fiduciary obligation? Alright well
fiduciary refers to the responsible person, who has oversight, above a given
financial transaction, or process. That is, it is the fiduciary obligation, of the
head of a corporation's Audit Committee, to be certain that the
accounting process is handled fairly, objectively, inclusively and thoroughly [boss overseeing worker]
and there are a few other ly's in there, but well you get the gist. Doesn't it
seem strange, that some companies just seem to get into the same kind of
trouble again and again. Remember the BP oil spill, well it wasn't the first time
they'd had, an accident. You know, if you can call that spill only an accident.
What kind of oversight did they have? Any? Well some companies just have a [man carrying oil barrel
corporate culture that's run by the notion, that well, whatever isn't caught
as a crime, is legal. Lots of Wall Street stock brokerages came and went this
way. Yah, remember the Wolf of Wall Street? Kind of like that. Well what is
the obligation of a responsible party when faced with ethical dilemmas? Where
does the obligation start and stop? Should fiduciaries be held to a higher
personal standard than normal people? Yah, kind of the, you know, Harvey
Weinstein effect there. Yes, No, maybe, alright. Right, all three times. [question ABCD chart]
It's definitely yes, no, or maybe.
Up Next
What are Prudent Investor Rule Standards, the Know Your Client Rule, and unsuitable recommendations?