As an fee-only investment advisor I come across clients from all walks of life. Lately I have noticed something in common with many of these investors. Many do not know the difference between an investment advisor and a broker who manages and/or makes securities recommendations for their clients’ investment portfolios. With the almost unprecedented volatility in the securities markets, you cannot afford to dig your head in the sand when it comes to whom is managing your assets.
In short, an investment advisor has a fiduciary obligation to act in the best interest of its clients. Investment advisors are required to register either with the Securities and Exchange Commission (SEC) or the states in which they operate in and are regulated under the Investment Advisors Act of 1940. According to Rule 206 of the Investment Advisors Act of 1940, investment advisors are considered fiduciaries, and as such, owe their clients a higher fiduciary duty. What this means in layman’s terms is that advisors must operate in a way that avoids conflicts of interest, puts their clients’ interests ahead of their own and make a full disclosure of their fees.
On the other hand, brokers (which are registered representatives of a brokerage firm [or in industry lingo a "broker-dealer"]) are salespeople whose primary responsibility is to help clients buy and sell securities for their accounts. While there is nothing wrong with this, investors should be made fully aware that broker-dealers are subject to the Securities Exchange Act of 1934, a different regulatory rule than for investment advisors. As such, their principal obligation is to make suitable recommendations (emphasis ours) to their clients and as such, do not necessarily owe their clients a fiduciary duty.
I decided to write this piece because the differences between an investment advisor and a broker-dealer have become quite blurred over the years. Many broker dealers market themselves as offering financial advisor or investment consultant services. I think it is quite critical for the general investing public to know these differences. Many investors may have a false sense of security that their “advisor” may be continually managing and acting in the best interest of their clients, when in reality this may not be the case. In addition, be aware that just because your broker may be recommending a suitable security for you, their primary goal may not be to act in your best interest, but rather to generate a commission for their employer’s brokerage arm.
Editor’s Note: Article previously published here.
…
Tome Tomaj is an investment advisor representative and a financial markets investor. He is the founder of White River Capital Management LLC, an independent registered investment advisor. White River specializes in the management of separately managed investment accounts for individuals and institutions. To find out more about his investment philosophy and sign-up for his FREE market commentaries and articles, please visit: http://www.wr-cap.com/signup.html
Read more articles written by Tome Tomaj
Related posts:
- How to Invest in a Rough Economy: Investment Advice from the Experts
The stock market crash of 2008 lost many investors a lot of money, and had many other investors bailing out of stocks for the safety of savings and checking accounts, treasury bills and gold. However, it is still possible to invest – and yes, even make money – during the... - What Is The Difference Between Netbooks And Laptops?
Lately, one question that keeps constantly popping up with laptop buyers – what is the difference between netbooks and laptops? If you’re buying the latest mobile computer, should you go with a netbook or laptop? What are the major differences and which one should you buy? First, you have to... - How to Tell the Difference Between Anxiety and Normal Worry
Anxiety is a normal feeling people experience when faced with threat, danger or stress. Feeling anxious can sometimes be a good thing. Occasional anxiety is part of normal life. However, for some people anxiety is a constant factor in their lives. When a person has anxiety problems, it interferes with... - The Difference between Video Blogging and Podcasting
Some people assume that video blogging and podcasting is the same thing. As you read earlier, this is not the case. They are two very different elements, even if they have similar properties. A video blog, as the name suggests, is a video that is placed on the traditional blog... - The Difference Between Hotels, Vacation Homes and a Bed and Breakfast
When it is time to take the family on vacation, most of us think only about getting a hotel room. Sure, we might also consider a tent campground, a RV or travel trailer, and possibly even a beach condo, but how many of us realize that we have more choices... - The Difference Between SubDomains And Add-On Domain Names Basics
Let us assume that you have a very good domain name with you. Did you ever know that you could add and compliment another domain in addition to your existing domain name? These domain names are known by the names like sub domains or add-on domains. However, they are almost... - Built-in Trust: Increase Sales Exponentially with a New Breed of Strategic Partnerships
Wouldn’t it be nice if you could bypass the competition and get in front of hundreds of qualified prospects who are looking forward to talking with you? No cold-calling or expensive advertising. No sales calls to people who don’t understand what you do or the value of it. No waiting... - Taking Advantage of the Stock Market
Is the market rebounding? The Dow, leveling out each week because it gets a rise in the market one day and a pullback the next day, comes from investors’ taking their profits. This will probably continue for a year or so until the really large investors such as Hedge Fund... - What is Forex Trading
Forex trading involves dealing in international currencies. Here, one can sell currency of one country to buy that of another. The trader deals in Foreign Exchange [Forex] at the most appropriate time to profit from the transaction. Good ability to forecast plays a vital role here. One may wonder how... - Understanding Your 401(k), IRA and Other Pre-Tax Investments
Yes, the values of various stock are falling every day and the media can not make up its collective mind if we are coming out of the recession or if there is still a long road ahead. What does all of this mean to you, the average investor. Well, if... - Developing a 401k Strategy In The Modern Employment Market
What is the biggest pain that comes with every job search? I’m not talking about the job search itself, I’m talking about some of the typical “housekeeping” that you have to do. Is it file for unemployment? Is it refigure your budget? Is it developing a new schedule? For me,... - The Advantages of Automated Forex Trading
Forex trading is nowadays the preferred form of investment for an increasing number of people these days. It is apparent why this is so. As the largest trading market in the world, the Forex market has a steadily growing trading volume, which has risen from around $500 billion to about... - Have You Outgrown the Company Name You Started With? Renaming Tips
Although the most common reason clients come to my company for a new business name is a stern warning letter they’ve received from a law firm charging trademark infringement, the second most common reason for renaming is that the company has outgrown its original name in some way. If this... - Calculating Interest on Forex Trades
One of the best things about Forex trading is the fact that one can trade using leverage, thus borrowing as much as 1,000 times your capital in order to make a trade. However, borrowing money for trading in foreign exchange is the same as borrowing it for other purposes-interest must... - How To Buy Real Estate in Mexico
Buying Property In Mexico Buying property in Mexico has become more popular every year. Whether you would like to purchase a vacation home or are planning on retiring there, owning real estate in Mexico is easy and safe. With its incredible natural resources, rapidly improving economy and modern facilities and...