Volatile market swings create emotional minefields for many. Investors aren’t sure what to do to safeguard their money and often the people they assume can be trusted don’t have the customer’s best interest in mind.
In the financial arena, most professionals carry one of two designations: broker or registered investment advisor. Both deal with financial and investment products and it’s a safe bet that most people assume they do essentially the same job.
There is, however, a significant difference. Registered investment advisors are held to a fiduciary standard, while brokers must comply with a suitability standard.
The suitability standard gives advisors the most wiggle room: It simply requires that investments must fit clients’ investing objectives, time horizon and experience.
In contrast, the fiduciary standard requires advisors to put client interests ahead of their own.
For instance, faced with two identical products but with different fees, an advisor under the fiduciary standard would be compelled to recommend the one with the least cost to the client, even if it meant fewer dollars in the company’s coffers — and his or her own pocket.
Broker vs. Registered Investment Advisor
In actual practice, here are some of the major differences between a broker and a registered investment advisor:
- Once a broker sells you a product, he bears no responsibility for monitoring or advising you on that investment. A registered investment adviser must review and analyze your investments.
- Registered investment advisors are regulated by the Securities Exchange Commission or by state securities regulators. Brokers are regulated by the Financial Industry Regulatory Authority.
- Some financial professionals actually carry both designations. They have a broker/dealer license and a registered investment license. In those cases, it is perfectly acceptable for a client to ask which capacity he is fulfilling in any given situation.
The fiduciary standard appears to have the upper hand in terms of providing a benefit for underlying clients. Given the strict rules for investment fiduciaries, there is little question that the fiduciary standard protects individual and institutional investors more than the suitability standard.
It can be hard for investors to know what to do and whom to trust. Understanding that a financial fiduciary is required to act in the best interest of his clients should help alleviate some of those concerns and help you feel good again about investing your money.
