It seems like a simple question. The answer, unfortunately, is not so simple. The financial services industry and the government agencies that regulate them are currently at a crossroads, trying to determine what standard of care the industry should provide to customers. The reason for this debate stems mostly on the convergence of two separate but related business models: the broker-dealer model, which transacts purchases and sales of securities for customers; and the investment adviser model, which provides advise to customers about securities and/or manages accounts for them.
For many years, these two business models were separate and distinct, and because of the nature of the services provided to customers, also had separate and distinct standards of care. Broker-dealers and the stockbrokers who work for them generally operate under the “suitability rule,” which requires that the recommendations provided to customers be “suitable” based on a number of factors, including age, income, net worth, risk tolerance, and investment objectives.
Investment advisers, on the other hand, owe their clients a higher “fiduciary duty,” which requires them to put the best interests of their clients before their own interests. However, the evolving nature of the brokerage industry has resulted in activities that look very similar to those of the investment adviser industry. In fact, many financial advisers are licensed as both broker-dealer “agents” and investment adviser “representatives.” Studies have shown that most customers do not know whether their financial advisers are associated with a broker-dealer or an investment adviser, and that each carries a different standard of care.
Recent Regulatory Activity
As part of the Dodd-Frank Act of 2010, Congress authorized (but did not mandate) the Securities Exchange Commission (SEC) to adopt a rule that imposed a fiduciary duty standard on the brokerage industry. By 2016, the SEC had not adopted the rule. The Department of Labor (DOL) then stepped in and adopted a rule to apply the fiduciary standard to all investment professionals who provide retirement investment advice, which included IRA and similar retirement accounts with brokerage firms. However, the Trump Administration extended the phase-in periods and in June 2018, the Fifth Circuit Court of Appeals vacated the DOL rule.
The SEC, for its part, issued a proposed “best interest” rule in April 2018, which requires the disclosure of conflicts of interest to customers and requires brokerage firms to establish, maintain, and enforce written policies and procedures to identify, disclose and mitigate, or eliminate, material conflicts of interest.
With the public comment period now ended for the SEC proposed rule, the financial services industry, as well as the investment public and regulators, await the final rule.
What You Can Do
Be aware that titles such as “financial adviser,” “financial professional,” “investment professional,” and the like are meaningless when it comes to what duty is owed to you. If your financial adviser is an “investment adviser” or “investment adviser representative,” he or she owes a fiduciary duty to you and must always act in your best interest. If your financial adviser is a “broker-dealer agent” or “broker-dealer representative,” he or she generally does not owe you a fiduciary duty and is only required to make “suitable” investment recommendations (and is not required to monitor your account). Keep in mind, however, that some courts have imposed a fiduciary duty on broker dealers and agents under certain circumstances.
Always look your financial adviser up on FINRA’s BrokerCheck to see what licenses he or she has, if any. The license will tell you what standard of care is owed to you as the customer.