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Brad Tinnon

Is Your Advisor Required To Act In Your Best Interest?

This is probably a question that you’ve never considered, yet the answer to it would likely surprise you.  Essentially there are two types of financial professionals: Registered Investment Advisors and Registered Representatives.  The difference between the two may not seem readily transparent, but my hope is to educate you so that you will be an informed investor.

Registered Investment Advisors (RIAs)

RIAs (which is what my firm is) are firms who give financial advice, provide investment analysis / management, and issue recommendations.  RIAs are governed by the Investment Advisers Act of 1940 and they legally MUST act in the best interests of their clients.  They must put their clients’ interests ahead of their own.  As such, they operate as a fiduciary. Additionally, they are legally required to disclose all conflicts of interest.  An RIA is typically compensated by charging a fee for the advice / investment management that they provide.

Registered Representatives (RRs)

RRs are typically salespeople who sell products to their clients. They may give financial advice, but ultimately this advice usually involves buying some type of product with a commission. RRs are governed by the Securities Exchange Act of 1934 and believe it or not, they legally DO NOT have to act in the best interests of their clients. In fact, the profitability of the company for which they work can take priority over doing what is best for you. This is why commission-based products exist under this structure and why RR’s often have sales / product quotas imposed on them by their company.

RRs are not legally required to disclose conflicts of interest.  For example, they don’t have to disclose that they are providing you a more expensive product even though a lesser expensive, similar one exists in the marketplace. Instead, they only have to provide investments that are “suitable” for their clients.

As an investor, it’s important that you discern who is acting as your fiduciary (doing what’s in your best interest) versus who is acting as a salesperson (selling you a suitable product).  You should always ask yourself, “Is my advisor doing this for my best interest or his / her best interest?”  I am not opposed to RRs, as I myself, started out as one and many already do what’s in the clients’ best interests even if they are not legally required to do so.  However, I do think it’s time that all financial professionals be “legally” required to act in the best interests of their clients.

Brad E.S. Tinnon

P.S.  We would love to hear any comments you have.  Please share them below.

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