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Why We Are Legally Required to Care about You More Than Investment Brokers

As most clients hopefully know, Professional Financial Solutions (PFS) is a registered investment advisor firm.  Most people reading this piece of information would likely see little reason to give it a second thought, but knowing whether the person or firm managing your investments is acting as a registered investment advisor or as a broker is actually a very significant issue.  Essentially, it is a question of whether they are putting your interest first or their own.

Registered Investment Advisors:  Putting You First.  Registered investment advisors are legally bound to act as a fiduciary to their clients.  According to the Investment Advisors Act of 1940, this means that we must “act in the best interest of the [client] without regard to [our own] financial or other interest.”  For registered investment advisors that use load funds or otherwise earn commissions from guiding you into particular investments, this means that they cannot churn your account (in other words, switch your investment holdings frequently) simply in order to generate more revenue for themselves.  At PFS, we do not receive commissions based on investments you purchase, but instead are paid directly by you, our clients, based on a percentage of the assets that we manage.  As fiduciaries, however, we are obliged to advise you according to your best interest, even if that means that we manage a smaller amount of assets and therefore earn less revenue.  For example, we may advise a client to use funds to pay off a debt, give funds to a charity, and/or keep some retirement funds in a low-cost retirement plan (e.g. the TSP for federal employees) rather than invest them under our management.  This is our legal responsibility, and we take it seriously.

Brokers:  Putting You First?  Obviously, some brokers will put client interests above their own, but since they are not legally required to do so, many will not.  Based on the regulations under FINRA (the Financial Industry Regulatory Authority), brokers must abide by the suitability standard.  This means that they must simply have a “reasonable basis” for believing that a particular investment that they sell to a client is “suitable” for a client, considering a client’s age, financial situation, investment objectives, risk tolerance, etc.  (It is important to remember that while they may call themselves financial advisors, wealth managers, or financial planners on their business cards, they are essentially salespeople working for the broker.)  Suitability is a much lower standard that still leaves room for brokers to advance their own interest through investment recommendations that also increase their compensation.  (Morgan Stanley actually outlines the differences very clearly on their website, since their representatives are sometimes acting as brokers and sometimes as investment advisors, which is similar to Fidelity, Charles Schwab, and others.)  The Department of Labor recently proposed expanding the scope of the fiduciary rule to include anyone providing retirement investment advice, including brokers, but the current proposal has not been adopted and faces opposition from a number of industry groups, including FINRA.

Don’t take chances with your investments.  If you hire someone to manage your investments, make sure he or she is a registered investment advisor, ready and willing (and required by law) to put your interests first.


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