You may think that all investment professionals are operating equally under the same laws. However, this is not the case. Various types of financial advisors are subject to different regulatory standards. The two regulatory directives are commonly known as the fiduciary standard and the suitability standard. Two main types of financial advisors are fiduciary financial advisors (also known as investment advisors) and investment brokers (also known as broker-dealers).
Fiduciary Financial Advisors are bound by the fiduciary standard of care that requires that they put the interests of their clients ahead of their own. They have a duty of loyalty and care toward their clients. The Fiduciary standard is regulated by the Securities and Exchange Commission (SEC), an independent federal government regulatory agency that protects investors and regulates the securities markets.
Unlike fiduciary financial advisors, brokers are bound by the “suitability standard,” defined as the obligation to make recommendations that are suitable for their clients. The recommendations do not need to be in the best interests of the client. Brokers have a conflict of interest in serving the brokerage firms where they work, their own interests in earning commissions on sales, and the client. The suitability standard is set by the Financial Industry Regulatory Authority (FINRA). FINRA is an independent nongovernmental organization with regulatory oversight. The SEC oversees FINRA.
With only a suitability standard, it is easy to see how a broker may choose options that are not necessarily the best choice for the client. Avoid brokers who have conflicts of interest because they sell products. If you would like to work with a financial advisor who is looking out for your best interest, we recommend that you choose a fiduciary financial advisor.
