Have you ever questioned the differences between various investment professionals?  Many consider the investment advice they receive from each party as comparable, but there is a key difference.  The main difference is that brokers, sometimes also called “financial advisors”, earn sales commissions by selling investment products while registered investment advisors receive advising fees by helping their clients select investments. Did you know — brokers are allowed to recommend a mutual fund or other investment that would garner the broker a higher fee or commission as long as the investment is deemed “suitable”. This can incentivize brokers to sell their firms’ own products ahead of competing products that may be available at a lower cost or that may better match the client’s needs. In contrast, an investment advisor is required to act as a fiduciary in the best interests of the client.

It should be noted that a client who wishes to work with a broker can always ask if the broker will agree in writing to voluntarily adhere to this higher fiduciary standard.

“Brokerage firms would like you to think that they perform the same functions as investment advisors. Many brokers call themselves ‘financial consultants’ or ‘financial advisors’. But they are not the same as independent investment advisors… an investment advisor’s fiduciary duty is on a higher plane, like that of a lawyer, a trustee, or the executor of an estate.”  – Arthur Levitt, former SEC Chairman

 

The Fiduciary Standard (Registered Investment Advisor) Tobin Investment Planning LLC is an independent registered investment advisor. As such we are required to put our client’s interests above our own. We owe our clients a duty of loyalty and care, and must act in their best interest. Additionally, an investment advisor must disclose any potential conflicts of interest.  This Fiduciary standard was established as part of the Investment Advisers Act of 1940.  Registered investment advisors are regulated by either the Securities and Exchange Commission or State Securities Regulators.

The Suitability Rule (Broker) Brokers, sometimes called “financial advisors”, may not be a Registered Investment Advisors and are regulated by the Financial Industry Regulatory Authority (FINRA), and are subject to a lesser standard; they only need to make recommendations “suitable” to their customers. This suitability standard only requires the broker-dealer to reasonably believe that any recommendations made are suitable for clients, in terms of the client’s financial needs, objectives and unique circumstances. This lesser standard would allow a broker to recommend a mutual fund or other investment that would garner the broker a higher fee or commission as long as the investment is suitable for the client. This can incentivize brokers to sell their firms own products ahead of competing products that may be available at a lower cost or that may better match the client’s needs.

Another critical distinction is the duty of loyalty.  A broker’s duty is to the broker-dealer he or she works for, not necessarily to the client served by that broker-dealer. Additionally, the need to disclose potential conflicts of interest is not as strict a requirement for brokers; an investment only has to be suitable, it doesn’t necessarily have to be consistent with the individual investor’s objectives and profile or be the lowest cost option or be in the client’s best interest.