Many financial advisors are registered as both representatives of a broker-dealer and as investment-advisor representatives of an investment advisor.
Investment advisors are fiduciaries who owe the client a higher oath of loyalty. They must act in their clients’ best interest and disclose any conflicts of interest.
Registered representatives are not fiduciaries. The advice they offer the client must suit the client’s particular situation. However, they do not have to disclose any conflicts of interest.
If that is not confusing enough, there is a third standard, a fiduciary advisor who falls under ERISA, the law governing retirement and pension plans. Unlike investment advisors who can have conflicts of interest as long as these are disclosed, an ERISA fiduciary advisor must eliminate all conflicts.
Which Registration Is Right for You?
I do most of my wealth management business (90%) as an investment advisor representative (fiduciary). I charge the client a level or a fee-only, usually based on their portfolio’s size and complexity.
If the client has a smaller account, such as a Roth IRA or a 529 Plan, or is a teacher saving in a 403(b) plan, I opt to receive commissions as a registered representative. Most of these clients end up paying less with a commission-based product. Moreover, maybe they do not need as much time as those who pay an annual fee.
A Uniform Standard of Care
Under the 2010 Dodd-Frank Act, Congress directed the Securities and Exchange Commission (SEC) to study the need for establishing a new, uniform federal fiduciary standard of care for brokers and investment advisors.
Having a uniform standard would make it easier for investors, as many are unaware that there are two standards and that the same financial advisor could wear both hats.
The New Rule from the SEC
Beginning June 30, 2020, broker-dealers will start operating under a new standard called Regulation Best Interest. This requires brokers to better align their interests with those of their clients by eliminating conflicts of interest, such as proprietary product requirements, sales quotas, or sales contests.
Registered representatives will now be called financial professionals. Any advisors who are fiduciaries can continue calling themselves financial advisors.
Some critics complain that the new standard does not meet the uniform standard’s original intent.
These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
More About Tim
I am licensed in Massachusetts, Rhode Island, New Hampshire, Connecticut, and Maine, including Boston and surrounding cities. So when you need an independent financial advisor in Massachusetts – Swampscott or the North Shore, Norwell, or another town on the South Shore, Topsfield, and the Merrimack Valley, MetroWest including Hopkington, or the Southcoast, Martha’s Vineyard, Nantucket, and Newport, Rhode Island from my Dartmouth office.
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