What Kind of Advisor Are You Working With?
With all of the financial troubles and retirement account mistakes that have plagued investors in this country lately, the investment industry has been debating the regulations and standards expected of financial professionals.
One major area of disagreement comes with respect to whether the standards expected of all financial professionals should be identical. As it stands now, there are different expectations for brokers and advisors.
History of the standards
In the 1940s, laws were established for the brokerage industry. Brokers are, in essence, the middlemen between investors and registered investments. They create transactions, buying and selling investments for profit. While some transactions are done on behalf of a client, brokers will also buy and sell securities for themselves.
The standard established for brokers was an obligation to ensure that the investment is "suitable" for the client. There is no requirement to take care of the client, such as recommending a product that is truly in the best interest of the client. In fact, a broker is not required to gather adequate background on a client in order to ensure that the products provided really meet the needs of the client.
During the same time period, the Investment Advisors Act of 1940 was passed to establish a standard for those who provide investment advice. Contrary to the standard required of a broker, an advisor must gather details about the client and provide recommendations that are in the best interest of the client. There is a fiduciary obligation taken on by an investment advisor, and there is heavier responsibility expected of the advisor.
Sadly, the differences between the two roles have been glossed over, and most investor clients are not aware of the differences.
Registered representatives
Registered representatives are employees of broker-dealer firms. For example, wirehouse firms are broker-dealers. As employees of broker-dealers, registered representatives are expected to follow the suitability standard when assisting their clients in choosing investment options.
Registered representatives, as employees, have a duty to their employer to help the company make a profit. While most registered representatives will make an effort to present sound options, the client is really not the employer's first priority.
Another fact often unknown by investor clients is that registered representatives are not able to provide investment advice. With liability concerns, the broker dealer employer often will not support this activity by their registered representative employees. This is interesting when we recognize that so many of them call themselves financial advisors.
Some broker-dealers will also register as investment advisors. Some registered representatives are then able to be investment advisor representatives. However, many financial professionals who call themselves advisors have not taken this extra step.
Investment advisors
The fiduciary standard expected of an investment advisor requires an advisor to put the client's interest above his or her own interest. It requires a truly unbiased recommendation.
As such, investment advisors provide fee-based advice. Since they are compensated the same regardless of the advice given, a client can be more confident that the recommendations are really in their best interest.
Investment advisors must get to know their clients as completely as possible to make sure that the advice provided best meets the client's needs.
While broker-dealers are less open with respect to their compensation arrangements, investment advisors must disclose this, along with any potential conflicts of interest. This enables clients the opportunity to determine their level of comfort with following through with the advice given.
Investor clients are welcome to choose to work with either registered representatives or investment advisors. There is nothing inherently wrong with either choice. However, it is most important to understand the role that the financial professional has agreed to take in working with you so that you can feel comfortable with the actions you take as a result.
About the Author
Ozeme J. Bonnette is a financial coach, speaker, and the author of Get What Belongs to You: A Christian Guide to Managing Your Finances. After working for a top financial services firm, she shifted her focus to teaching and speaking to groups and organizations working to increase financial literacy in the U.S. She earned 3 Bachelor's degrees at Fresno State and an MBA at UCLA's Anderson School. Find her at http://www.thechristianmoneycoach.com .
Tell others about
this page:
Comments? Questions? Email Here