The world of investment advisors and stockbrokers can be confusing. Both investment advisors and stockbrokers can manage your portfolio, help you invest, and suggest strategies to help raise your returns. The major difference between the two is a matter of professional ethics; only investment advisors are held to the fiduciary standard. Here is what you need to know about fiduciary standards to make an informed decision about where to seek investment advice.
The Fiduciary Standard
The Investment Advisors Act of 1940 states that investment advisors are held to a fiduciary standard. The fiduciary standard requires advisors to put your financial interests as a client before their own. This means you can expect independent advice from an investment advisor, rather than recommendations intended to line the advisor’s own pockets. For example, even if one investment would yield a higher commission, an investment advisor must forfeit this additional revenue if the investment isn’t in your best interest.
Meanwhile, a stockbroker could steer you toward a high-commission investment over a better, lower commission one, as long as the high-commission option could be deemed “suitable” for someone in your financial situation.
Accuracy
The fiduciary standard also stipulates that investment advisors must use accurate and thorough information to make investment advice. They’ll usually need to spend time learning about your personal financial situation to create an individualized plan based on your needs and desires. In contrast, a broker can peddle the same investment opportunity to many clients because it is overall a good investment for most people.
Conflicts of Interest
Investment advisors are required to disclose any potential conflicts of interest in advance. This allows you to fairly assess the integrity of their advice. If you feel that the risk of outside influence is too great, you can stop the professional relationship before you invest.
Stockbrokers and the Suitability Rule
Stockbrokers are not held to the same fiduciary standard as investment advisors. Financial advisors are regulated by the Securities and Exchange Commission (SEC) or by state securities regulators who enforce the fiduciary standard. Broker-dealers, however, operate under a suitability obligation that is regulated by the Financial Industry Regulatory Authority (FINRA).
FINRA only requires broker-dealers to make suitable recommendations to clients. Unlike an investment advisor who must put your needs first, a broker can, and frequently will, put the needs of the broker-dealer first.
On average, long-term investors tend to benefit from having an investment advisor rather than a broker. The fiduciary standard provides you with better protection than the suitability rule. Imagine if your doctor chose to prescribe a $10,000 medication for a condition that could be treated better with diet and exercise. Would you go back to see him? What if you knew that the pharmaceutical company that manufactured the drug paid him a generous commission every time one of his patients filled a prescription? Most of us recognize that this situation is absurd, even dangerous. When it comes to your well-being, physical or financial, you’re better off seeking help from an unbiased professional.
Sara McKinney
saractag@gmail.com
As Cowen Tax Advisory Group’s Digital Content Marketing Specialist, Sara provides in-house copywriting and manages the company’s electronic records system, email marketing, and blog.
