Nov 12

A higher standard: understanding the types of financial advisors and under what rules they operate

(BPT) – What’s in a name? When choosing a brand of paper towels or laundry detergent, one name may be as good as another. When it comes to selecting a financial advisor, however, consumers should know there are different types of advisors who are held to significantly different professional standards.

Registered investment advisors (RIAs), for example, are regulated by the Securities and Exchange Commission (SEC) or individual states. They are held to a “fiduciary” standard of care, which means they have a legal duty to place the interests of their clients first. Brokers, or registered representatives, are regulated by the Financial Industry Regulatory Agency (FINRA) and are generally not considered investment advisors by federal regulators. They are held to a lower “suitability” standard, although FINRA views that as including a “best interest” of the client standard.

While more than half of U.S. investors use a professional financial advisor (a catch-all phrase that some might see as including financial planners, accountants, brokers, RIAs and even insurance salespeople), four in 10 don’t know which standards govern their advisor, according to a 2013 survey conducted by TD Ameritrade Institutional. Yet it is a key distinction.

“It’s not uncommon for investors to think a broker is the same as a registered investment advisor,” says Skip Schweiss, managing director of advisor advocacy and industry affairs for TD Ameritrade Institutional. “Even savvy investors may not know the difference. But different types of advisors deliver different types of services and are held to different professional standards. Before you invest with any advisor, it’s important to understand what their credentials mean, and under what accountability standards they operate.”

Fiduciary vs. suitability

There are two basic standards for financial advisors: fiduciary and suitability. Of these two standards, Schweiss says, the fiduciary standard for RIAs is the higher one. Under the fiduciary standard, RIAs are bound by a 74-year-old federal act – and regulated by the SEC and state regulators. While both RIAs and brokers are required to act in their client’s best financial interests, RIAs are required to put their client’s interest first, even above their own or their company’s interests.

Brokers (also known as registered representatives) operate under the suitability standard. They are required to have reasonable grounds for believing that securities recommendations are suitable based on information provided by the customer regarding other security holdings, financial and tax status, and investment objectives, and other information that would reasonably need to be considered.

“Financial advice can come from practically anywhere these days,” Schweiss says. “Some of it will be good, some will be spurious. When you’re investing your money, it’s important to do your homework and not only research the individual or firm who is helping to manage your money, but the laws and standards to which they are held accountable.”

Schweiss also offers these tips for choosing an advisor:

* Know who regulates the advisor you’re considering. The regulatory body he or she answers to can clarify what standards he or she operates under.

* Ask how he or she is compensated. By companies selling investment products? Fees paid by clients? Commissions? Compensation type may give you an idea of any potential conflicts of interest between what’s best for your money and what puts the most money in the advisor’s pocket.

* Learn whether the advisor has been disciplined in the past for dishonesty or inappropriate behavior. You can find background information on financial advisors through the websites of the SEC, FINRA, National Association of Personal Financial Advisors, Certified Planning Board of Standards and the Financial Planning Association. Information may also be available through your state securities agency.

* Ask how frequently your advisor’s firm conducts audits, and if your portfolio assets will be handled by a third-party custodian. A custodian will provide a monthly statement of your assets to both you and your advisor.

“Information is an investor’s greatest asset,” Schweiss says. “While investing always carries an array of different risks, selecting the right advisor and knowing how he or she operates can help ensure your investments are in alignment with your plans and risk tolerance. Investors can help themselves by choosing an advisor who works to help them pursue their own goals.”

Provided by: TD Ameritrade Holding Corporation, brokerage services provided by TD Ameritrade, Inc. member FINRA/SIPC.

About the survey: An online survey was conducted by True North Market Insights on behalf of TD Ameritrade. The survey was conducted among a representative sample of 1,000 general population consumers between May 14 and May 21, 2013.

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