Why use an independent Registered Investment Advisor?

A Registered Investment Adviser (RIA) is an investment adviser registered with the Securities and Exchange Commission or a state’s securities agency.  Financial planners and wealth managers fall under these securities laws even though they may or may not advise on securities.

RIAs can be compensated in a number of ways, 1) fee-only (fixed fee, percentage of assets under management, hourly fees, or some combination), 2) commissions (paid from the sale of investment or insurance products), and 3) fee based (a combination of fees and commissions).  Don’t be confused by the similar terms, fee based advisors can, and do sell products for a commission.

An RIA must adhere to a fiduciary standard

This standard requires RIAs to act and serve a client’s best interests with the intent to eliminate, or at least to expose, all potential conflicts of interest which might incline an investment adviser, consciously or unconsciously, to render advice which was not in the best interest of the clients.

To “promote compliance with fiduciary standards by advisers and their personnel,” in 2004, the SEC required RIAs to adopt a code of ethics setting forth “standards of conduct expected of RIA’s personnel and to address any conflicts of interest that may arise.

Investment Adviser Fiduciary Standard vs. Broker-Dealer Suitability

The Investment Advisers Act of 1940 exempts from the definition of an Investment Adviser, and therefore the associated fiduciary standard.

Financial Industry Regulatory Authority (FINRA), the US Securities Self-Regulatory Organization (SRO) which has authority over Brokers and Dealers, determined that Broker-Dealers are “not to be deemed investment advisors” and therefore are not subject to the same fiduciary standards as IAs when recommending investments to clients, as are RIAs.

Registered Representatives affiliated with a Broker Dealer are required to recommend securities that are deemed “suitable” for non-institutional clients.  The FINRA “Suitability” standard requires that a member shall make reasonable efforts to obtain information concerning a client’s:

  1. Financial status
  2. Tax status
  3. Investment objectives
  4. Risk tolerance
  5. Other information used or considered to be reasonable

The know your customer rule requires that a firm or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”

So would you rather work with someone that is simply required not to harm you, or someone that is required to put your interests ahead of all else?

For more information go to “What does ‘independent Registered Investment Advisor’ mean?

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