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 those who give advice, provide investment analysis, 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. Essentially, they are operating 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 that they provide and the firm is typically an independent firm not owned by another company.
Registered Representatives (RRs)
For lack of a better word, RRs are typically stockbrokers who buy and sell stocks, bonds, and mutual funds for their clients. They 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. Additionally, they are not legally required to disclose all conflicts of interest. Instead they have to provide investments that are “suitable” for their clients. An RR is typically compensated by product commissions and they are typically employees / contractors for another firm.
As an investor, it’s important that you discern who is acting as your fiduciary (doing what’s in your best interest) and 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
CERTIFIED FINANCIAL PLANNER™
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