What is a Registered Investment Adviser?
A fiduciary is a person or entity that manages money for the benefit of another called a beneficiary. A fiduciary is bound by law to place the interests of its beneficiary first – before the fiduciary’s own interests.
Not everyone offering financial advice to their clients is a fiduciary. Stockbrokers (also called “Registered Representatives”, “Account Executives”, “Financial Advisors” or “Wealth Managers”) and even Certified Financial Planners (CFP) affiliated or employed by broker dealers are not fiduciaries, even though they have engaged in high visibility advertising to portray themselves as full service financial advisors.
A Registered Investment Advisor (“RIA”) subject to the Investment Advisors Act of 1940, is a fiduciary.
The legal investment advising standards that govern a non-fiduciary stockbroker and a fiduciary RIA are very different.
- A non-fiduciary stockbroker follows only the “suitability”
standard, which does not require a stockbroker to place the interest of its
clients ahead of its own. Under the non-fiduciary suitability standard, a
stockbroker need provide only “suitability advice” to its clients
even if the stockbroker knows that the advice is not the best advice for the
client.
- A fiduciary RIA must follow the “trust” standard – the highest known in law – which requires it to place the interest of its clients ahead of its own and fulfill critical fiduciary duties of trust and confidence. Under the fiduciary trust standard, a Registered Investment Advisor must provide its “best advice” to a client.
Even if a non – fiduciary stockbroker wanted to follow the “trust” standard of law and become a fiduciary to its clients, he cannot do so because of the contract he has with his broker dealer. Such contracts require the stockbroker to place the interests of the broker dealer before the interests of the stockbroker’s clients.
A stockbroker owes fiduciary duties only to its broker dealer – not to its investment clients. A RIA owes fiduciary duties to its investment clients because it does not have a broker dealer.
Stockbrokers, subject to the Securities Exchange Act of 1934, maintain that they are regulated heavily by the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (FINRA), formerly the NASD and the various agencies in the states in which they do business. None of this less strict regulation concerning the “suitablility” standard, though, registers stockbrokers with the SEC as investment advisors under the more strict regulation concerning the fiduciary standard of the Investment Advisors Act of 1940.
The critical difference between a stockbroker and a RIA is that the RIA is
subject to the higher fiduciary legal standard when providing advising services
while the stockbroker is not.
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investment advisor with the Office of Financial Regulation of the Florida Financial
Services Commission. The information and opinions contained in this document
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