When investors look for a trusted investment professional to guide them through the murky investing waters, they have many decisions to make. One of those decisions is whether to work with a Broker, who works under the ‘suitability standard,’ or to work with an Investment Adviser, who works under the ‘fiduciary duty.’
At the center of this decision are business practices and regulatory guidelines that are rarely understood by the client and often blurred in practice. Brokers are governed by the ‘suitability standard,’ which requires them to have “reasonable grounds for believing that the recommendation is suitable,” according to the Financial Industry Regulatory Authority. Registered Investment Advisors (RIAs) are supposed to adhere to a higher standard, called the ‘fiduciary duty,’ an ethical and legal requirement that the investor’s best interest comes first, not the adviser’s own financial gain.
The conventional view of the two camps goes like this: the brokers at the big firms have access to every product imaginable, but may be pressured to sell you one of them and earn more if they do. They are not obligated to get you the best price for what they advise you to buy or sell - or even to be free of conflicts. And that’s where the problem lies. In the wake of Michael Lewis’ recent book, ‘Flash Boys,’ this concept is coming under even more fire. If a broker isn’t obligated to get you the best price, then are you paying too much? Are you the one left holding the bag?
On the flip side, the independent investment advisers proudly promote their independence and lack of conflicts. If their clients feel that the fiduciary responsibility was not met, they have legal recourse through the state courts. Since independent investment advisers trade through a third party, usually using limit orders (which sets a price they are willing to transact a purchase or sale), the client is getting best execution for their orders.
In practice, though, the two standards seem to confuse investors. When explaining the difference to clients they usually come to understand the difference, but overall the investment adviser and brokerage businesses don’t do a good job of educating the public on this topic. I wonder if the powerful brokerage business doesn’t want anyone to know!
- Brian Valenti
Generation Capital Management (GCM) is an independent, SEC-Registered Investment Advisor located in Rochester, NY. Since 2003, we have provided value to our clients through a premium level of investment service and an unbiased, effective investment process. If you have questions or need additional information, please feel free to contact us at: (585) 232 – 8560.