So, who is giving you investment advice? Does it really matter? I hope so! They are handling your life savings! So why does it matter so much and how do I choose? Well there are two models that regulate most individuals who help with investments. One model is that of an Investment Advisor which is held to a Fiduciary standard and the other is a Broker which is held to a Suitability standard. So, here’s your choice…
Investment Advisor (Fiduciary) vs Broker (Suitability)
I know, you are saying, “That means nothing to me!” Let’s take a look at the two models in more detail…
The Investment Advisers Act of 1940 defines a “Registered Investment Advisor” as:
“a person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.”
Advisors provide advice and recommendations, and are paid a fee (that is not at all associated with the investments chosen).
The U.S. Securities and Exchange Commission (SEC) holds investment advisors to a fiduciary standard that requires them to act in the best interest of the client, more specifically stating that they must put their clients’ interests above their own.
The Securities Exchange Act of 1934 defines “Broker” as:
“any person engaged in the business of effecting transactions in securities for the account of others.”
Brokers are paid via commissions tied to investments in the funds they select for their client’s retirement plans.
The Financial Industry Regulatory Authority (FINRA) holds brokers to a Suitability standard which states that a Broker needs to believe that recommendations given are consistent with the interests of the client’s financial needs and circumstances at the time. The rule does not set standards around conflicts of interest or a need to place clients’ interests before one’s own — as a result, many believe the suitability rule leaves room for conflicts to arise between a Broker and client. One of the biggest conflicts concerns commissions paid to the broker.
Here is a good video that sums it all up nicely…