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Is Your Financial Advisor Working On Your Behalf

Updated on June 18, 2012

The Fiduciary Standard

In the community of those who provide the public with financial guidance, there are many different titles that a professional may hold. Most often those whom seek financial guidance are greatly unaware of exactly what the obligation is of the advisor whom is guiding them. Most would assume that regardless of how they are compensated, an advisor must provide a client with the best advice possible. Unfortunately…legally speaking…this is not always the case.

It is very important to distinguish between the “Registered Investment Advisor” and all other forms of financial advisors. Herein lies the difference between those whom are Fiduciaries on behalf of their clients and those whom are not.

Broker Dealers & Insurance Agents

A broker dealer is a brokerage firm. They are in the business of facilitating transactions on behalf of their clients. They can not only place transactions on your behalf, but at the same time provide guidance to their clients. Anyone who is employed with a broker dealer and provides financial guidance is registered with the Financial Industry Regulatory Authority (FINRA). FINRA will require these individuals to pass some basic competency exams like the series 7 on the rules, regulations and basic suitability of the clients they assist. However, the official standard of any guidance provided to a client is that it must be “suitable” and “appropriate”. Similarly, when dealing with an insurance agent whom is licensed by the state in which they are registered, the guidance requires that the agent act with the “utmost good faith”. The reason for such loose terminology is that in such instances the broker or agent is legally obligated to represent the interest of the firm they are employed with. This means they work for the financial institution and NOT the client. They are by no means required to provide the client with the best advice. Most often their compensation structure dictates that they get paid a commission for the products they sell. This is now even true with the employees of most discount brokerages who serve the retail investor.

Registered Investment Advisors

Registered investment advisors (RIA’s) are required to register with the state in which they are domiciled. Should they provide active investment management services to the public, they are required to register with the Securities & Exchange Commission (SEC) once their assets under management exceed 100 million dollars. An RIA by definition is required to be a Fiduciary on behalf of their clients who they provide investment management services to.

What exactly is a Fiduciary ??? The official text book definition is a person whom property or power is entrusted for the benefit of another. Under the Investment Advisors Act of 1940…Investment Advisors are required to act and serve a client's best interests with the intent to eliminate, or at least to expose, all potential conflicts of interest which might incline an investment adviser—consciously or unconsciously—to render advice which was not in the best interest of the RIA's clients.

Clearly there is a substantial difference in the standards of care. A broker dealer or insurance agent is essentially a sales person. Their primary goal must be to sell the products or generate transactions on behalf of their employer. While the investment advisor works only for the client. RIA’s typically receive their compensation as an annual fee for assets under management. Some choose to charge a flat fee or an hourly fee for financial planning services. Their fee structure is very transparent, and depending on the type of accounts involved, unlike commissions they can be partially tax deductible.

The Hybrid Model

Most major brokerage firms and many insurance companies have begun to offer a fee based platform for investment management to their clients. While this may sound similar, it is not exactly the same thing. The brokerage firms have essentially set up subsidiary companies that are then registered with the SEC as an investment advisor. The employees of the firm are dually employed with both companies. This allows them to sell their investment management platform while still maintaining their broker dealer allegiance. While often the investment management platform may be a good one, the advisor is effectively permitted to “switch hats” back and forth in mid conversation depending on the topic being discussed. The problem is simply that the client may assume that the fee based approach is suitable, but then standard of care declines as the clients insurance needs are discussed. Often as a result of these two different models, the broker will often casually differentiate between the words “guidance” and “advice” as to stay in compliance with which hat they are wearing.

There has been great discussion about legislation that would hold the broker dealer industry to the similar fiduciary standard. Most broker dealers have lobbied against this, and it does not appear to be implemented any time soon.

As a client who is a member of the general public, you should always be aware of the motivations of the individual or group that is guiding you. Brokerage firms and insurance companies have directly influenced legislation as to NOT require their employees to best represent you. In our view the best model for the general public is that of the “Fee Only” RIA. One who is not employed with a broker dealer and presents no direct or indirect conflict of interest with the clients they represent. The RIA will typically select a broker dealer for you to custodian your accounts and effect transactions. They will typically maintain some formal transactional authority over the account for the purpose of buying or selling securities on your behalf. But they will not be employed by the brokerage firm.

The one aspect to be aware of with an RIA is that the requirements to register as an RIA are not particularly stringent. So while there may not be a conflict of interest involved, that does not indicate competency. It is prudent to look for an RIA with one or more of the respected professional designations within the financial industry. The three most common and difficult to obtain from a competency perspective are…

Certified Financial Planner (CFP®)

Chartered Financial Analyst (CFA®)

Chartered Financial Consultant (ChFC®)

For investors whom are interested in researching investment advisors in their local community, there are a number of resources. The Financial Planning Association is among them. Not all FPA members are fee only advisors. But many are. There is also the National Association of Personal Financial Advisors (NAPFA). All NAPFA members are fee only as a condition of membership.


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