What is Your Financial Professional — A Broker or Fiduciary?

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Reading Time:  3  minutes

A Brief History…

Over the last several decades the financial services industry has been split into two camps: the broker-dealer community and the registered investment advisory (RIA) community.  Brokers act as intermediaries between financial companies and consumers.  At a time, they were the only way you could purchase a financial product.  The legal standard to which a broker is held is called the “suitability” standard. This means that any financial product or service sold to the client had to be “suitable”.


Is “Suitability” the best standard?

Unfortunately, suitability can be vague and was subsequently abused over the years causing some financial professionals to sell products that a client didn’t need.  Actually, this became so bad that Congress blamed the stock market crash of 1929 on abuses of the standard and the subsequent depression of the 1930s and created the U.S. Investment Advisers Act of 1940 (“the Advisers Act“).  This began the formation of the RIA community and the creation of many additional regulations which produced a higher standard–one that was in the “client’s best interest”.  This is why RIAs are referred to as fiduciaries.  In short, the Advisers Act required financial professionals whose business was “giving financial advice” to register with the state(s) in which they did business or the Securities Exchange Commission (“SEC”).  This provided the potential client with access to several pertinent details about the financial professional including methods of compensation.

Fast Forward to Today…

More often than not, lawsuits against brokers are lost by clients because of the laxness of the suitability standard.  Brokers can always claim they were giving financial advice solely incidental to the product they were selling and were not in fact “financial advisors”.  Well the DOL rule eliminated this defense.  As a veteran of the financial services industry, I welcome this change and believe it will be a “rising tide that lifts all boats”.  Unfortunately, in each section of the financial services industry, we will continue to have bad actors, but this new rule will lessen the promulgation of unsuitable financial products that lose investors money. The rule’s one shortfall at this point is that it only covers “retirement accounts”.  However, I believe that it won’t be too long before the “powers that be” realize that a client may have both retirement and non-retirement assets with a broker and both buckets need to be treated equally.

I have prepared a “Q&A” of sorts to answer what I think maybe some of the questions individuals may want to ask.

A Few Questions (answered)…

Q: How can I found out if my advisor is part of a broker-dealer firm or a registered investment advisor firm?

Go to http://brokercheck.finra.org/.  Click the “firm” tab, and then type in the name of your investment professional’s firm. If the firm is a RIA it will say “investment adviser firm”. If it says “brokerage firm”, then your guy or gal is part of a broker-dealer.

Q: What is the main difference between a broker and a fiduciary?

A: The standard each is held to is the major difference. RIA firms comply with the legislation set forth by the US Investment Advisers Act of 1940 and hold themselves out as “investment advisers”. This transparency allows for potential clients to have access to the type of financial business and the methods of compensation the adviser will use. This can all be found online for every RIA and is called the “firm brochure“.  (Look up one here.) Broker-dealer firms are not held to such a standard and there is no transparency on the type of financial business they are in nor the methods of compensation used.

Q: What is the DOL rule proposing?  Is it dead?

A:  There are numerous proposals and “back and forths”.  Just Google “DOL rule” and you’ll get the latest update.  At this point, a federal mandate has been hard to impose, but it appears trade organizations like the Certified Planning Board of Standards and state regulators are trying to make something happen.

Q: What should I do if my financial professional is not part of a registered investment advisor (“RIA”)?

A: This is a good time to have a conversation with your financial professional. Let them address your concerns about the implications of this rule and whether they and the firm they work for are willing to be held to a higher standard. They should be able to demonstrate their willingness to comply with all rules that put your interests before those of them or the firm they work for.  Need help on what to look for or ask?  Check out this video.


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Best Mortgage Broker Australia

Wow! this is great.

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As an advocate for financial education, I love to share my knowledge in a “jargon-free” way to help you understand what it will take to win with your money!

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