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What Difference Does It Make?


No...this is not a political post.  As always this post relates to financial planning for military professionals.  As military members, especially senior military officers, transition to the civilian world they often decide that they might want some help managing their financial affairs.  So, they turn to a Financial Advisor.  But just what are they getting?

The terms Financial Advisor, Financial Planner, Wealth Manager and others like them have no specific meaning or definition.  Even a designation like Certified Financial Planner® is in actuality a Trademark and the person using the mark must meet the requirements of the trademark owner to use the designation.  But, there are two terms that you should pay attention to.

  1. Registered Investment Advisor (and Investment Advisor Representative).  A Registered Investment Advisors (RIA) is a company that is registered either with and governed by the Securities Exchange Commission (SEC) or their State depending on the size of the firm.  Investment Advisor Representatives are the people who work for the RIA and they are also registered with and governed by the SEC or the State.  Note that these are governmental entities.
  2. Broker/Dealer (and Registered Representative).  A Broker/Dealer is a company that is registered with and governed by the Financial Industry Regulatory Agency (FINRA).  Registered Representatives are the individuals that work for a Broker/Dealer and they are also registered with and governed by FINRA.  FINRA is a self-regulatory agency.  In other words, Broker/Dealers pay fees to register with FINRA and FINRA then in turn regulates its members.

Now, how Financial Advisors are regulated may not be a big deal to you.  I see some conflicts of interest in the Broker/Dealer model.  But what is more important is how these different types of financial advisors must treat you.

  • An RIA must meet a Fiduciary Standard under the law.  A Fiduciary Standard of Care means that an RIA must always act in their client's best interest.  If not, they are in violation of the law.
  • Broker/Dealers, on the other hand, must only meet a standard of Fair Dealing.  This standard is often called a Suitability Standard.  Broker/Dealers are specifically exempted from the law that requires RIAs to meet a Fiduciary Standard.  This is because their advice is incidental to the sales process.  The end result is that a Broker/Dealer can make a recommendation to you that makes the Broker/Dealer more money even if it potentially lowers the return that you earn.

This is not meant to imply that all Broker/Dealers are crooks or that all RIAs are saints.  There are good and bad people in both types of firms.

I admit, I'm biased.  C.L. Sheldon & Company, LLC is registered as an RIA.  But, I often wonder why someone would select and advisor that isn't required to act in the client's best interest.

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Comment   |  6 years, 6 months ago from Alexandria, VA