Warning: Coming Soon to Brokerage Statements
Some investors may be surprised to see the following disclaimers on their brokerage statements: "Your account is a brokerage account and not an advisory account" and "Our interests may not always be the same as yours."
You're saying 'what?' You see, in the regular world a doctor is a doctor, a dentist is a dentist, and a CPA is a CPA. But, in the investment world just about anyone can use the term "investment advisor." But, the SEC (the regulatory god of the investment world) is about to tighten up on the use of the term. Brokerage firms who do NOT register as investment advisors will be required to include the above disclaimers in the documents and statements they provide to clients. Such firms are expected to recommend investments that are suitable to your needs, but they are not required to act in your best interest. These firms can only give investment advice which is incidental to their job as "investment order-takers." How can you know the difference? Just ask for a copy of the advisor's Form ADV. If you get a blank look you'll know you're not speaking to an investment advisor.
The group that's not required to include these discalimers are brokerage and other firms who DO register as investment advisors. Registered Investment Advisor (RIA) firms must select suitable investments for you. Plus, they are required to ensure that your best interests are being met. These folks will gladly offer you a copy of their ADV and their firm's code of ethics.
The bottomline? It makes sense to be aware of the source of any investment advice you may choose to act upon and whether it is coming from someone who is obligated to act solely in
your best interests. Knowing the answers to these types of questions makes it quite a bit easier to make a decision when considering with whom to entrust your life's savings.
Addendumum (1/30/06) (See WSJ, January 28, 2006; Page B1):
"Generally, only two types of titles are scrutinized by regulators, and therefore offer consumers legal protections: broker-dealers and registered investment advisers. Broker-dealers (think: stockbroker) serve primarily as stock-market order-takers, facilitating trades on Wall Street and in the bond market. They report to the NASD, the brokerage industry's self-regulatory arm. Registered investment advisers (think: financial planners), which report to the SEC, primarily provide services such as building a financial plan or offering tax- and estate-planning advice.
"Broker-dealers and advisers are held to different standards when dealing with clients. Brokers must abide by so-called suitability rules requiring they "know the customer" and offer investments suitable to a client's needs.
"The concept of "suitability" can be murky, however, and brokers aren't obligated to act solely in your best interest. The NASD has been strengthening suitability rules in recent years. Still the organization last year fined the industry a record $125.4 million for transgressions including inappropriate sales of annuities and mutual funds.
"By contrast, registered investment advisers are subject to a so-called fiduciary duty, a legal standard mandating they act solely in your best interest. Advisers also are subject to disclosure rules requiring they provide to clients Form ADV listing potential conflicts of interest, compensation practices and disciplinary proceedings."
You're saying 'what?' You see, in the regular world a doctor is a doctor, a dentist is a dentist, and a CPA is a CPA. But, in the investment world just about anyone can use the term "investment advisor." But, the SEC (the regulatory god of the investment world) is about to tighten up on the use of the term. Brokerage firms who do NOT register as investment advisors will be required to include the above disclaimers in the documents and statements they provide to clients. Such firms are expected to recommend investments that are suitable to your needs, but they are not required to act in your best interest. These firms can only give investment advice which is incidental to their job as "investment order-takers." How can you know the difference? Just ask for a copy of the advisor's Form ADV. If you get a blank look you'll know you're not speaking to an investment advisor.
The group that's not required to include these discalimers are brokerage and other firms who DO register as investment advisors. Registered Investment Advisor (RIA) firms must select suitable investments for you. Plus, they are required to ensure that your best interests are being met. These folks will gladly offer you a copy of their ADV and their firm's code of ethics.
The bottomline? It makes sense to be aware of the source of any investment advice you may choose to act upon and whether it is coming from someone who is obligated to act solely in
your best interests. Knowing the answers to these types of questions makes it quite a bit easier to make a decision when considering with whom to entrust your life's savings.
Addendumum (1/30/06) (See WSJ, January 28, 2006; Page B1):
"Generally, only two types of titles are scrutinized by regulators, and therefore offer consumers legal protections: broker-dealers and registered investment advisers. Broker-dealers (think: stockbroker) serve primarily as stock-market order-takers, facilitating trades on Wall Street and in the bond market. They report to the NASD, the brokerage industry's self-regulatory arm. Registered investment advisers (think: financial planners), which report to the SEC, primarily provide services such as building a financial plan or offering tax- and estate-planning advice.
"Broker-dealers and advisers are held to different standards when dealing with clients. Brokers must abide by so-called suitability rules requiring they "know the customer" and offer investments suitable to a client's needs.
"The concept of "suitability" can be murky, however, and brokers aren't obligated to act solely in your best interest. The NASD has been strengthening suitability rules in recent years. Still the organization last year fined the industry a record $125.4 million for transgressions including inappropriate sales of annuities and mutual funds.
"By contrast, registered investment advisers are subject to a so-called fiduciary duty, a legal standard mandating they act solely in your best interest. Advisers also are subject to disclosure rules requiring they provide to clients Form ADV listing potential conflicts of interest, compensation practices and disciplinary proceedings."
posted by Sherman L. Doll, CPA/PFS at
1:41 PM
