Understanding Different Types of Financial Advisors: Investment Advisors, Registered Representatives, and ERISA Fiduciaries
Financial Advisor Tim Hayes
I am an Investment Adviser Representative at Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser (RIA) based in Fairfield, IA. I am also registered with Cambridge Investment Research, Inc., an independent broker-dealer with over 3,000 registered representatives nationwide.
Most clients pay fee-only or an hourly rate. The size and complexity of the client’s wealth management and financial and retirement planning determine that fee.
Some clients pay a commission, mainly those with smaller accounts, i.e., Roth IRAs, some public-school teachers with 403b retirement accounts, or parents or grandparents who set up a 529 college savings plan.
The first introductory and fact-finding appointment can be in-person or by phone. The next meeting where I provide my recommendations should be in-person. (For the time being, telephone, Zoom, and email are replacing some in-person meetings.)
Subsequent meetings during which we monitor your progress and investments can be done in-person or by phone, email, Zoom, or Skype – or, more likely, a combination of these meeting types.
Overview of Different Types of Financial Advisors
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.
How ERISA Differs from Investment Advisors
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 Financial Advisor 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.