The fiduciary standard
Q: What’s a “fiduciary” standard? — A.H., Burley, Idaho
A: A fiduciary standard requires people who might give you financial advice to act in your best interest, recommending or doing whatever will serve you best and avoiding any conflict of interest.
Some advisers (like broker-dealers) may simply abide by a “suitability” standard, recommending or doing whatever is suitable for their clients. What’s suitable, though, may not be what’s best — and it might earn them a sales commission that a better move for you might not. Indeed, among your options for suitable investments, a nonfiduciary adviser might recommend the least suitable one. (Of course, many nonfiduciary advisers are still ethical and may serve you well.)
Supreme Court Justice Benjamin Cardozo famously referred to the fiduciary standard by noting, “A trustee is held to something stricter than the morals of the marketplace.” When you’re looking for financial advice, it’s smart to ensure that your adviser is held to the fiduciary standard, looking out for your best interest before his or her own. Registered Investment Advisers (RIAs) and Certified Financial Planners (CFPs) are generally held to the fiduciary standard.
Q: What’s an 8-K report? — L.C., Lexington, Kentucky
A: Publicly traded companies in the U.S. are required by the Securities and Exchange Commission (SEC) to release financial reports every quarter. If certain notable things happen between those reports that may impact the company’s health or performance, then an 8-K, or “current report,” must be filed. An 8-K might report a completed merger or acquisition, a bankruptcy filing, a change in top leadership, layoffs, or plant closures, among other things. You can look up SEC filings at SEC.gov.
Researching Companies
If you’re thinking about investing in a company, dig into it: Learn enough to make a confident, informed decision to buy or not to buy. Here are some questions you might ask. (Don’t worry about unfamiliar terms — just start learning about investing, and you’ll get better over time.)
Is the company in a growing industry?
What’s its business model How, exactly, does it make its money? Does it require a lot of money to operate and grow?
How has it been performing? Are its revenue, earnings and profit margins growing? How does it compare with competitors? Is it growing its market share?
What sustainable competitive advantages does it have? Examples include a strong brand, valuable patented technology, economies of scale, a big multinational presence and robust employee retention.
Does management impress you by communicating candidly (as in annual letters to shareholders) and executing smart strategies?
What risks does the company face? Many things could go wrong, such as losing a customer that accounts for a big chunk of its business.
Does the company pay a dividend? If so, what does it currently yield, and how much has it been increased over the past few years?
Does the stock seem overvalued or undervalued? (Ideally you’d buy shares that are undervalued.) Valuing a company is a subjective endeavor, but undervalued stocks typically have priceto-earnings (P/E) ratios below their own five-year averages and below those of competitors.
Next week we’ll offer some resources that can help you research companies of interest. In the meantime, you might learn more in investing books by Joel Greenblatt, Peter Lynch, Philip Fisher, John Bogle and The Motley Fool.