Posted By: CFP&WM On: Jul 8th, 2009 In: General info Investing My soap box

If you Invest There is One Thing You Gotta Know

If you don’t know anything else about investing, the one thing that is paramount to know is the different legal safeguards and standards of care depending upon from whom you receive your financial advice.

You have three options for receiving investment advice:

1) Registered Investment Advisor (RIA). According to state and federal law anyone providing financial advice for a fee must be registered with his or her State or the federal government as a Registered Investment Advisor (RIA). These individuals are paid a fee by their clients for the advice and are called “Fee–Only” Advisors. They have a legal and ethical requirement to always do what’s in the client’s best interest and is known as the “fiduciary standard” which is based on 5 core principles;

  • Put the client’s best interest first;
  • Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
  • Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
  • Avoid conflicts of interest; and
  • Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

2) Broker Dealer Representative. Another alternative is to get advice from a broker dealer representative who earns commissions by selling products. Unfortunately, these salespeople’s legal duty and obligation is to their employer (a large for-profit corporation) and not to their clients. There is no fiduciary standard, only the requirement that the salesperson provide products that are suitable. This means if there are three suitable products paying commissions of 7%, 5% and 1% it would be legally permissible to sell the high commission product even thought it was not best for the client. KEEP IN MIND EVERY TIME A COMMISSION IS INVOLVED THERE IS A CONFLICT OF INTEREST BETWEEN WHAT IS BEST FOR THE CLIENT AND WHAT IS BEST FOR THE SALESPERSON AND THEIR COMPANY.

3) Duel Registration. Recently, some advisers are both a representative of a broker dealer (sell products for commission) as well as being an RIA and charging fees for advice. The problem with this situation is the client has an extremely difficult time knowing when the advisor is wearing the hat of a RIA with its fiduciary responsibility to always do what’s right or when the advisor is in fact operating under the lower standard of suitability during the selling process. This has become a greater problem since the federal courts struck down certain SEC guidelines. Many brokerage firms and banks now provide the option of “money management” and collect a fee for referring the client to a RIA to have their assets managed.

76% of investors surveyed did not know the difference in the methodologies and safeguards between using the services of a RIA and broker dealer. As a result, most investors pay more for their investment advice via the commissions and higher costs associated with using commission-based products than if they use the services of an RIA and the use of noncommissioned products.


The only way for you to know that the advice you’re getting is always in your best interest and you have the protection of the fiduciary standard is to use a Fee-Only advisor who does not sell product.

Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek, and AARP all recommend readers use “fee only” advisors who provide advise and do not sell products with the inherent conflicts of interest.

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