By Martin Weil
Learn more about Martin on NerdWallet’s Ask an Advisor
Anyone who has read my posts knows that I make a big deal out of the greatly under-appreciated differences between standards of care required of advisors and that of brokers. Registered Investment Advisors are held to a fiduciary standard and must act in the best interests of the client. Brokers are held to a suitability standard and a broker must reasonably judge a recommended investment to be appropriate. While this may seem a minor difference of language, in practice the consequences to an investor are significant.
Given the more stringent stipulations for investment fiduciaries, there is little question that the fiduciary standard better protects individual and institutional investors, than the suitability standard.
A consumer wishing to find out whether either party has a record of violating either of these standards can check the following sources: the SEC’s Advisor Search page for Registered Investment Advisors and FINRAs Broker Check for stock brokers & dealers. These sites will record whether any complaints or regulatory actions have been filed against the parties. But, hold on a minute, what’s this?
Seems that FINRA (a self-regulatory membership body of broker/dealers) is increasingly “wiping the slate clean” for brokers whose records contain a history of complaints and even legal actions. Said one lawyer “consumers are using Broker Check now like TripAdvisor… and no one wants to see these red flags on their records.” Isn’t that after all the point?
Given this latest disclosure of how the brokerage industry serves its own interests first, consumers are well advised to look for investment professionals who are Registered Investment Advisors, acting under a fiduciary standard Always ask for their ADV disclosure document and preferably look for those paid under a “fee-only” arrangement to minimize the potential for conflicts of interest.