When it comes to financial advice, it isn’t always clear how, or how much, you pay for services received, a key input to assess motivation. Lack of clarity leads to a lack of trust, one of the most significant barriers to working with a financial advisor. How can investors seeking guidance find the right match for their needs?  

While the investing public sees financial advisors as a homogenous whole, two distinct groups operate under very different standards. In the first case are broker-dealers and their agents. Broker-dealers use armies of registered representatives who sell products for commissions under a suitability standard, a requirement that those products are simply suitable for the client. Regulators deemed a suitability standard appropriate since the broker engaged in a business transaction and was not rendering ongoing investment advice.

In the second case are Registered Investment Advisors (RIA). An RIA operates under a fiduciary standard, a legally mandated expectation that any recommendations proposed by the RIA are made with the client’s interests first. A fiduciary standard is much higher than a suitability standard. Clients pay an RIA for services performed or based on assets under management under the umbrella of offering ongoing investment advice rather than by commission.

The confusion started years ago as brokers and agents began to market themselves as advisors, attempting to shed the sales image and suggesting a higher standard of care that may or may not have been in place. Some advisors operate under both standards or are dually registered, a bewildering arrangement allowing them to earn revenue under a fiduciary standard as an RIA and sell products for commission as a broker or agent under a suitability standard. Regulators expect dually-registered brokers to disclose to clients whenever their role changes. Individual investors could forgive themselves for being entirely discouraged about finding guidance from someone who was always working on their behalf.

The latest regulatory effort to better delineate these distinctions, Regulation Best Interest (Reg BI), issued in 2020, tries to clarify some of these problems, but it still needs to be revised. In one example, brokers will not be allowed to use the term advisor except when acting as an advisor to anyone other than a retail client. Does that sound less confusing? As a result, several states are taking independent action to adopt heightened standards for brokers.   

As an RIA since 1987, we have always acted as a fiduciary for our clients. Yet brokers and agents have a place for clients who want the products they sell. The thrust of Reg BI is one of additional disclosure, which is a good step. However, the key to reducing investor confusion is to understand the motivations and incentives of your broker/advisor. This understanding comes from asking two simple questions; how am I paying you, and how much am I paying? Once you know those answers, you know whether you are talking to a sales agent or an advisor.   

Disclosure: https://mitchcap.com/disclosure/