Who’s In Charge Here?
All financial planners, investment advisors, wealth managers (insert word for money, followed by a word for a person) are registered with either a Broker-Dealer or a Registered Investment Advisor (RIA or IA). Individuals who work for a Broker Dealer are referred to as Registered Representatives while those working for a Registered Investment Advisor are, confusingly, called Investment Advisor Representatives. Which entity they are registered with in no way speaks to their qualifications as an advisor, only who sets the rules by which they must. Of note, whether they call themselves planners, wealth managers, money manager or investment adviser (or adviser as the US tax code generally spells it) is not typically regulated, nor does it necessarily accurately reflect their primary focus or areas of strength.
Registered Investment Advisors are regulated by either the states in which they do business or by the Securities and Exchange Commission (SEC), determined primarily by how much assets they have under management. The rules and statutes guiding an investment adviser’s business are set out in the Investment Adviser’s Act of 1940, written in 1941. Just Kidding. Broker-Dealers are governed by a self-regulating organization (SRO) called FINRA, rather than states or the SEC. Neither is better or worse, but they do have differences.
Of particular importance is the fiduciary standard of care laid out in the act of 1940, by which all Registered Investment Advisors (and Investment Advisor Representatives) are required to abide. Simply put, this legally and ethically requires those governed under the act to put their clients’ interests above all else, including their own, working to eliminate or disclose any and all existing or potential conflicts. This fiduciary standard is the primary difference between individuals working for a Broker-Dealer and those working for an Investment Advisor.
While there is legislation being discussed that would require certain retirement accounts held at Broker-Dealers to be treated with a fiduciary standard, Registered Representatives who work for a Broker-Dealer are not currently held to the fiduciary standard. In contrast, they are held to the “suitability” standard, requiring the advisor place a client in a “suitable” investment based on a reasonable effort to obtain certain information about the clients’ objectives. A registered Representative may have more, less or the same experience, knowledge, and ability than an Investment Advisor Representative.
A list of questions to ask your financial advisor can be found easily on the web, but you may want to consider starting your conversation with “who’s in charge here?”