Investment Advisor or Stockbroker: Do You Know the Difference?
By K.C. King, CFA, CIC, Managing Director
It’s all about fiduciary responsibility. Only the Investment Advisor has the fiduciary duty to a client, yet most investors do not know this. Fiduciary duty sounds complicated. It isn’t. If your investment professional is subject to a fiduciary standard, he or she has an obligation to place the client’s interests first, above all others. This is a key protection for investors and is the foundation of the relationship for the majority of Investment Advisory firms, like Emerson.
Because the language of today’s financial markets is so confusing – every investment professional uses self-descriptive terms such as advisor, consultant, or counselor – the difference between those subject to a fiduciary standard and those subject to the lesser standard of “suitability” is often difficult to discern. The easiest way to determine this is to ask your investment professional. Ask “What agency regulates your firm?” and “Are you subject to a fiduciary standard or a suitability standard?” The answer is important.
As the reverberations of the stock market meltdown of 2008-2009 rumble through the financial markets, there is a hue and cry for regulation of systematic risk, sub-prime mortgages, securitization of mortgage related instruments, credit default swaps, and hedge fund managers. Many clamor for the elimination of regulatory gaps between governing bodies, most notably the SEC, Congress, and some industry sponsored self-regulatory organizations like Financial Industry Regulatory Authority (FINRA), which governs broker-dealers (the majority of whom are stock brokers.) The new buzzword is “harmonization” of regulation. Like “deleveraging,” harmonization sounds like a good thing and sounds easy to accomplish.
There are some groups, like broker-dealers, whose call for harmonization means consolidation of oversight underneath FINRA, the self-regulatory organization sponsored by the brokerage industry. For years broker-dealers have resisted regulation that would subject them to a higher standard of fiduciary duty. They argue that their current standard for sales practices is good enough for their clients and has worked well for years. This current broker-dealer standard, called the suitability standard, is the belief that an investment is suitable for their clients. Suitability is a lowerstandard than fiduciary duty. We, like most independent professional advisors, believe that the brokerage industry’s argument for maintaining their current standard is not in their clients’ best interests. While there have been lapses in coverage by all regulating bodies: the SEC, Congress, and the U.S. Commodity Futures Trading Commission; consolidation of investment advisor and broker regulation under the standard of suitability is not what would best serve investors.
We believe that our clients would like to have their investment managers held to the highest standard, insuring that the investor’s interests come first. At Emerson, this is the basis of our relationship with clients; ask any of us to give you examples of how this benefits you and we will be happy to do so. Be sure your financial professional is a fiduciary. Don’t settle for a lower standard.