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*The views expressed by the authors below do not represent the views or opinions of MD Preferred Services.

The Suitable Fiduciary

Monday, January 24, 2011

The finance reform has created many questions regarding financial advisors. This article discusses the differences between a fiduciary advisor and a suitability broker. A registered investment advisor (RIA) works under the Investment Advisor Act of 1940. A broker-dealer works under the Securities Act of 1933. The Investment Advisor Act of 1940 requires the advisor to act as a fiduciary and therefore act in the best interest of the client. Generally an ongoing relationship is developed when working with an RIA. The RIA provides unbiased advice about the investments being managed and directs the investments based on the goals of the clients.

Brokers, under the title of Registered Rep, are commissioned sales people who typically work for a bank, insurance company or broker-dealer. Brokers sell products that are “suitable” for their clients. The suitability test is therefore managed by gathering some basic information such as age, risk tolerance and investment objectives. This method of data collection provides a wide range of products to be sold and may or may not be in the best interest of the consumer. The wide range is intended to provide a “pick-a-product” environment.

To complicate matters the SEC has let brokers register as Registered Investment Advisors while working with or being associated with a broker-dealer. This dually registered method is fraught with conflicts of interest. It is not possible to sell a product and be a fiduciary at the same time.

An employee of a broker-dealer has a duty of loyalty to the company they work for. Most bank employees, insurance sales people and stock brokers work for public companies. As an employee of such company, they are required to work in the best interest of that company to maximize the profits of that company. This enables the stock holders of that company to receive dividends based on the amount of profits and how well that company was managed.

If the banker, insurance agent or stock broker is not working to sell the company’s products, then the company’s profits will fall short of expected returns. The stockholders will see their investment suffer and stock price as well as dividends will decrease.

Insurance agents are generally required to sell their company products. In this regard, it is not possible to make an unbiased decision for a consumer. The consumer is provided a product based on the agent’s affiliated company and not on the needs of the consumer or whether it is the best product for the consumer. Once again, they are not acting as a fiduciary.

So how can one be part of a Registered Investment Advisor and be connected to a broker-dealer? There currently are no restrictions with being affiliated with a broker-dealer as well as being registered as a RIA. Unfortunately the consumer suffers and the cloud over the industry is not clear. Which “hat” is the person wearing when working with a client? Are they a salesperson or a fiduciary?

Consumers need to be aware that not all financial advisors are providing the same unbiased advice. They need to education themselves on these basic topics. There are clear differences and a true RIA fiduciary is required to work in the client’s best interest.

By Dennis K. O’Brien, Coastal Financial Advisors, Inc.,, 732-683-2330


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