Financial Standards and Questions to Ask Your Financial Advisor

As a fiduciary financial advisor in Los Angeles, my hope is to shed light on types of financial advisors in the marketplace and how to find a fiduciary. Historically, investors have several reasons to doubt if financial advisors are serving them under a fiduciary standard acting in their best interest. Regulators of the Securities and Exchange Commission (SEC) and states have made laws over the years to give more transparency. Yet, investors are not always aware of the standards in place and how they are protected. It’s important to understand the types of financial advisors encountered in the crowded financial marketplace.

 

Financial Standards and Questions to Ask Your Financial Advisor

Types of Financial Advisors

There are three types of financial advisors: investment advisers, brokers and dual-registered advisors. A financial advisor working at a broker-dealer is either a broker or dual-registered advisor. A financial advisor working at a registered investment advisor is either an investment adviser or dual-registered advisor. To make matters more confusing, financial advisors usually operate under business titles given by their firm such as: wealth advisor, wealth manager, financial consultant, investment consultant or portfolio manager.

Investment Advisers

Investment advisers are subject to the fiduciary standard, the highest legal standard in the financial advisor profession. Advisers must carry the Series 65 license which enables them to provide ongoing advice and investment management to clients for a fee.

Brokers

Brokers are subject to the suitability standard, the lowest legal standard in the financial advisor profession. Brokers must carry the Series 7 license which enables them to take commissions for making trades.

Dual-Registered Advisors

There are situations where brokers and investment advisers may be a dual-registered advisor. In most cases, this is when a broker is able to sell managed accounts for a fee-based relationship and sell securities for a commission. The financial adviser can switch from being an investment adviser with a fiduciary standard to a broker that is not required to act in your best interest in the same conversation. Good luck figuring that one out.

Financial Standards: Fiduciary vs. Suitability

There are two separate standards when it comes to financial advisors, fiduciary and suitability. While they may seem like similar terms, they couldn’t be more different. There are significant differences between the two.

Fiduciary Standard

Investment advisers serve their clients under the fiduciary standard. Investment advisers cannot take extra commissions or charge above a reasonable fee. An adviser must put the interests of their clients above their own. An investment adviser must disclose conflicts of interest and avoid them when possible. An adviser cannot buy securities in their account before purchasing for the client.

Suitability Standard

Brokers serve their clients under the suitability standard. For a broker to make a recommendation, the broker must believe the investment is suitable to their client(s) based on their financial objectives and time horizon. Brokers are not required to put the interests of their clients above their own. Brokers are required to serve the broker-dealer they are employed at. Brokers may be compensated more for selling the fee-based products of their broker-dealer over third-party products. Suitability guidelines are not as strict in avoiding conflicts of interest.

Questions to Ask Your Financial Advisor

Whether you are starting to look for a new relationship or have been working with a financial advisor for several years, it’s important to find a financial advisor you can trust. Here are some questions that can help you identify if your financial advisor is required to serve as a fiduciary and put your interests first:

• Which licenses do you have? (Correct Answer: Your financial advisor may have several licenses, but the ones to listen for are Series 65 and/or CFP®. Incorrect Answer: Series 7.)
• Are you an investment adviser or a broker? (Correct Answer: Investment adviser. Incorrect Answer: Broker.)
• How do you get paid? (Correct Answer: Your financial advisor may list several ways they get paid, but you want to make sure they clarify that they get paid by fee-only. Incorrect Answer: Fee-based or commission-only.)

For More:
Why Working With a Fiduciary Financial Advisor Is Important

Why Working With a Fee-Only Financial Advisor Is Important

Why CERTIFIED FINANCIAL PLANNER™ Is Important (CFP® Professional)

Nerdwallet: 10 Questions to Ask a Financial Advisor

Fee-Only Fiduciary Financial Advisor in Los Angeles

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