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Plan Well, Retire Well

Saving and investing your money

Does it matter where my investment advisor works?


I've written many times about choosing an investment advisor or financial planner, but this week I've received a question that puts a different twist on the issue: Does it make a difference where my advisor works. For example, what if she works for one of the big brokerage firms?

The heart of the question is, How do I assure that my financial advisor is putting my interests first? In addition to knowing whether the person is a registered investment advisor (RIA) or a broker and how the person is compensated, now I want to know if the place of employment will affect the advice I get.

I believe the answer hinges on 1) whether the advisor has access to a sufficient and acceptable range of financial products to meet the client's needs and 2) whether there is a financial incentive to recommend one product over another. FINRA has proposed a new rule requiring disclosure of such "differential compensation" arrangements, which makes for some heavy reading. But such arrangements appear to be legal. In 1999, NASD (the predecessor to FINRA) requested comments on proposed rule changes that would have prohibited these practices. But I cannot find any record that the proposals were put into effect, and the current FINRA manual reflects none of those changes.

A brokerage, bank, or other financial institution may have its own in-house mutual funds or other financial products. There may well be incentives for the employee to sell those proprietary products when other products would be as good (or better) for the client. Or, the advisor may only have access to products from a limited number of providers. According to Financial Planning, a website for independent financial advisors, even "independent" brokers and advisers may be tied to a particular company's products. So let's back up a step and start from the beginning.

The first issue to understand is the difference between a broker (officially known as a registered representative) and a registered investment advisor (RIA). An RIA is required to meet a fiduciary standard, meaning that they must put your interests first. A broker, on the other hand, has to meet a suitability standard; investments they recommend must be suitable for the client, but that is a lower standard than the fiduciary requirement for RIAs.

Some financial professionals and some firms are dually registered, meaning that they are both a registered representative (broker) and an investment advisor (RIA). This is a trend among brokers who have decided to go out on their own. Apparently, the current rules allow the person to sometimes act as a broker and be regulated by the suitability standard, and at other times to wear the investment advisor hat and be held to the fiduciary standard.

The Dodd-Frank Act directed the U.S. Securities and Exchange Commission (SEC) to conduct a study to evaluate, among other things, whether consumers understand or are confused by the differences in the suitability of care that applies to broker-dealers and the fiduciary standard that applies to investment advisers.

The report, dated January 2011 recommended that the SEC "exercise its rulemaking authority to adopt and implement, with appropriate guidance, the uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers."

Right now, there is debate about who will be the regulatory authority to oversee and enforce this change. So stay tuned. Even if you understand the situation and rules today, some of this will change in the future.

To learn more, you might want to visit our website on Choosing a Financial Professional for more about the differences between brokers and investment advisors, and other criteria for choosing an advisor.



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