Did you know that registered investment advisors (RIAs) and broker/dealers (representatives) are held to a different standard of care when it comes to their clients? RIAs must meet the “fiduciary” standard as regulated by the Investment Advisers Act of 1940 whereas brokers and dealers must meet the “suitability” standard as governed by the Securities Exchange Act of 1934 and FINRA (The Financial Industry Regulatory Authority).
Should you care? Of course you should. When you get a recommendation from a registered representative (a broker), they must ensure that their recommendation is suitable for you. In other words, the security must be appropriate for you given your financial situation. However, it doesn’t mean that the security would necessarily meet the needs of your overall portfolio. It is more of a transactional focus rather than an advisory focus. An RIA, on the other hand, must ensure; that the clients’ needs are placed first, that they act in the best interest of the client (does it meet the client’s portfolio needs), and that all conflicts of interest are disclosed.
There is pending legislation to try and establish a universal standard for all financial professionals, however it would appear that it is far from reaching the floors for a vote in either the house or the senate. So what can you do as an investor? Simply knowing what type of relationship you are involved in with your financial professional is a great place to start. You know the saying, “Caveat Emptor,” Let the buyer beware.
Northwest Investment Counselors is an independent Registered Investment Advisory firm.