Fiduciary

When considering an investment professional most people do not understand the difference, or even realize there is one, between a broker and an advisor. Further confusing the matter is the fact that many brokers refer to themselves as a financial advisor or wealth advisor.  No matter the title, the standard under which an investment professional operates is extremely important to clarify and to understand. 

Fiduciary duty is the highest standard of care under U.S. law. An investment advisor representative working within a registered investment advisor (RIA) is a fiduciary. They are legally required under the Investment Advisers Act of 1940 to act in the best interests of clients.  This means client interests come before their own interests, conflicts of interests should be avoided to the extent possible, and, where a conflict of interest exists, it must be disclosed. RIAs are monitored by the Securities and Exchange Commission (SEC), and RIA representatives will normally have passed the Series 65 exam.

If you are working with a stockbroker, broker, insurance agent or similar type professional, they are likely operating under the suitability standard. In this case, the professional only has to provide recommendations that they believe are appropriate given a client’s situation; they do not have to recommend what they believe is the best option. Most investment professionals operating under the suitability standard are known as registered representatives and their oversight is through a self-regulatory organization called the Financial Industry Regulatory Authority (FINRA).

You just inherited $1 million and hire a broker to help manage the money. Maybe he’s your neighbor or the guy your friend uses. In discussing your situation, you mention that you want to be fairly conservative in investing the money; you also mention your $250,000 mortgage with a 5.5% mortgage rate. The new broker recommends a diversified portfolio of mutual funds with the option to invest part of your money in a variable annuity. Both options are suitable for you, and both options result in the broker being paid. However, if you had selected an advisor, operating under the suitability standard, they may have believed it was in your best interest to pay off the mortgage and invest the remainder of the money in a diversified portfolio. In this case, the advisor, operating under the fiduciary standard, would have to discuss the mortgage payoff with you even though doing this may result in lower fees to the advisor. You got what you wanted with the broker; you may not have received the advice you needed.