Your best interest

There has been much ado in the financial services industry lately over the difference between brokers and advisors. In many ways, they are the same. In other ways, however, they are very different. It ends up the responsibility of the investor to learn and distinguish those differences. The good news is that investors recently got help from the Securities and Exchange Commission (SEC) in the form of new regulations scheduled to take effect later this year.

Historically, brokers were those who traded stocks and other securities. Any advice they might give clients was considered incidental to those transactions. They are typically compensated by investment product manufacturers, making them primarily just salespeople. Recently, however, brokerage firms have taken on stronger advisory roles. Taking on this expanded role allows them to market themselves as one-stop shops for investors.

Fiduciary advisors, on the other hand, are those who openly give financial advice. They are paid directly by their clients and are expected to stay free of any conflicts of interest that arise when compensation comes from product manufacturers or brokerage houses. The ideal arrangement is for advisors to stay neutral in order to give clients unbiased advice. Any possible conflicts of interest are revealed up front so investors can make educated decisions.

Brokers are governed by the National Association of Securities Dealers (NASD) suitability rule, which takes a "try your best" approach when it comes to serving client needs. On the other hand, advisors registered with the SEC are generally considered fiduciaries. A fiduciary can be defined as "an individual or organization that acts with integrity and in the highest good faith." In other words, they put the interests of clients as their first and foremost priority.

As brokers have moved into more of an advisory role, they have not been held to the advisory standard of fiduciary responsibility. What ends up happening is that investors think they’re getting objective advice when brokers may only be serving their own interests in the recommendations they give.

The SEC’s recent move was only a partial victory, from the fiduciary standpoint. They upheld, despite much lobbying from fiduciary advisors, the exemption (from the Investment Advisors Act of 1940) saying that advice from brokers is incidental. They did, however, pass regulations requiring greater disclosure for brokerage firms. What this means for brokers such as Merrill Lynch, Smith Barney and UBS PaineWebber is that while they still won’t be held to the fiduciary standard, their forms, agreements and marketing materials must clearly state that broker interests may not be the same as investor interests and that they are compensated by product manufacturers.

As always, we at JWA Financial Group take the position that all advisors, however incidental their advice may seem, should hold themselves out as fiduciaries. Our clients always have been and always will be the only group we are serving.

 

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