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In the last couple of years, there has been much discussion within the industry and in the news about codifying the fiduciary duty that RIAs have always assumed. Traditionally, there have been two distinct types of investment professionals that interacted directly with individual investors; the investment advisor and the stock broker. They served two different functions and were paid differently.

. . . Acting in a fiduciary capacity, a Registered Investment Advisor is required by law to place the client's interests above his or her own and to never have conflicts with the client's interests. . .

The investment advisor performed the services indicated by the title; he provided unbiased investment advice and guidance for a fee. The client would then take the advice to his stock broker of choice who would complete the transactions recommended by the advisor. Both were well defined roles designed to help the client. Then the roles began blurring. Brokers began calling themselves advisors. As full service brokers began selling advice without the proper registration, the investing public was being somewhat short-changed. Clients were buying advice from brokers posing as advisors who were not being held to fiduciary standards. The titles advisor and broker are both legal titles the holders of each having different functions and different standards. To make that point a little clearer, a broker is required to ascertain that an investment is suitable for a client. An advisor must act in the client's best interest. Those appear to be similar statements, but they are not. Acting in a fiduciary capacity, a Registered Investment Advisor is required by law to place the client's interests above his or her own and to never have conflicts with the client's interests. The Advisor must act on behalf of the client's best interests in all financial advice and transactions. All costs must be disclosed to the client in advance and agreed to before implementation. Again, brokers are required only to ascertain that an investment is suitable or appropriate for a client; not necessarily the best choice, not necessarily in the client's best interests.


Disclosure Diversion

Over the years, I've observed that disclosure was the direction in which financial services firms diverted the attention of well-meaning, largely clueless regulators who were trying to protect consumers. Banks, wirehouses and fund companies became expert at burying material disclosures under mountains of words and data so impenetrable that few consumers could ferret out their secrets.

The bigger problem is that even if clear disclosures were made, not one consumer in a thousand would understand what they were being told. Stockbrokers, for instance, have to disclose they are registered representatives of their brokerage firms, and their U-4s explain their conflicts of interest, yet even many sophisticated investors still believe brokers have a duty to act in their clients' best interests.

- Bob Clark, Investment Advisor, September 2006, page 108.

In 2005, the SEC (Securities Exchange Commission) began requiring a disclosure on all brokerage applications. That disclosure is meant to alert investors to the differences in Advisors and brokers. The decision to require such a disclosure is a momentous change in the industry. Now brokers must disclose (though it is up to you to actually find and read the disclosure) that their interests and your interests may not be the same and that they may have conflicts of interests with yours and that they earn different amounts of commission on different products they sell. Notice in the wording below that even though the potential conflicts are mentioned, the onus is on you to ask questions to find out if there are conflicts in existence. The disclosure follows:

THIS IS A BROKERAGE SERVICE
The Securities and Exchange Commission requires all broker-dealers who give brokerage advice for a fee to make the following disclosure. Accounts enrolled in this service are brokerage accounts and not advisory accounts. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersonsí compensation, may vary by product and over time. Please call us at XXX-XXX-XXXX if you have questions about the differences between a brokerage service and an advisory service.

There are several sources of more information on the subject of choosing the type of financial service you need.

 

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Financial Counselors of VA is an independent Registered Investment Advisor based in Portsmouth, VA, providing
fee-only financial planning services and investment management advice to individuals and families since 1985.
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