Federal and state law requires that Registered Investment Advisors (RIA) be held to a Fiduciary
Standard. This requires an advisor to act solely in the best interest of the client at all
times. RIAs must disclose any conflict, or potential conflict, to the client prior to and throughout
a business engagement and must adopt a Code of Ethics and fully disclose how they are
Unfortunately, only a small proportion of “financial advisors” are federally or state-registered
RIAs. Most so-called financial advisors are considered “Broker-Dealers” by the Securities and
Exchange Commission (SEC). Brokers are not held to a Fiduciary Standard; they are held to the
lower Suitability Standard. In fact, they are required by federal law to act in the best interest of
their employer, not in the best interest of their clients.
Because broker-dealers are not necessarily acting in your best interest, the SEC requires them
to add the following disclosure to your client agreement. Read this disclosure, and decide if this
is the type of relationship you want to dictate your financial security:
“Your account is a brokerage account and not an advisory account. Our interests may not
always be the same as yours. Please ask us questions to make sure you understand your rights
and our obligations to you, including the extent of our obligations to disclose conflicts of interest
and to act in your best interest. We are paid both by you and, sometimes, by people who
compensate us based on what you buy. Therefore, our profits, and our salespersons’
compensation, may vary by product and over time.”
If this disclaimer appears in agreements you are signing, you are not working with a Fiduciary
advisor. If you wish to work with the broker, you should ask additional questions about how he
or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in
your best interest.
Be sure to read the fine print!