Investment Advisors
Excerpted from
Investment advisors
- Compensated for providing advice about securities
- Required to register with the SEC and are regulated under the Investment Advisors Act of 1940
- Advisors are fiduciaries, and owe customers a higher, fiduciary duty. In order to fulfill their fiduciary obligation, investment advisors must avoid conflicts of interest, make full disclosures of fees, and put their clients’ interests ahead of their own
- Generally has a continuing duty to monitor and advise the customer regarding performance and material events affecting the underlying investments
- For discretionary accounts, as circumstances may dictate, the advisor may be obliged to initiate appropriate, affirmative action to advance the customer’s interests
Brokers
- Salespeople. Let me say that again. SALESPEOPLE who just make recommendations and execute transactions
- Primary responsibility is assisting clients in the execution of stock and other securities trades
- Their principal duty is to make suitable recommendations to their customers, but they are not granted discretion. The customer determines whether or not the trade goes forward
- Not subject to the Investment Advisors Act and, accordingly, do not, per se, owe their clients a fiduciary duty
- Brokers are not legally required to put their clients’ interests ahead of their own, make the same level of disclosures about fees, or recommend the very best investments – just suitable ones
The confusion (aka, the art of marketing)
- Many broker-dealers now promote their brokers to the public as “financial advisors” or “financial consultants.”
- Most brokerage firms are now dually registered as both broker-dealers and investment advisors, treating some accounts as true advisory accounts (to which a fiduciary obligation attaches) and others as pure brokerage accounts (to which the lesser, suitability standard applies)