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How does a Broker of Record compare to an Advisory/Fiduciary relationship?

i.e. cannot give advice, less flexibility in fees, cannot work direct sold vendors, not a fiduciary etc

Mar 30, 2012 by Jean from San Diego, CA in  |  Flag
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16 votes

There are many differences. Among them is the incentive structure. The broker is incented to sell the plan, become the broker of record, and then collect the commissions, trails and/or residuals based on the contributions to the plan. The fiduciary advisor is likely to be compensated on a fee for advice and services basis. There's more transparency and accountability in the fee for services model. And, one likely area of advice would be around the costs of the plan investments. A broker will probably not recommend reducing costs if it affects the broker's earnings. A fiduciary advisor would not have the same conflict. Finally, the plan trustees can share some of their own fiduciary liability with another plan fiduciary, not with a non-fiduciary broker.

Comment   |  Flag   |  Mar 30, 2012 from San Diego, CA

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16 votes

Great question and the first two responses are very good. I'll just add some clarity - there are significant differences between a "broker" and a "fiduciary advisor", whether 3(21) or 3(38) (two sections in ERISA regarding fiduciary liability). The chief difference is that a fiduciary takes on specific ERISA responsibility when serving the plan and a broker does not. See previous comments. With that said, the term "broker of record" also serves as industry jargon for a broker or advisor who may serve your current plan without transitioning your vendor relationship. Additionally, the terms "advisor" and/or "consultant" are commonly used by non-fiduciary third parties. In summary, there are many types of advisors - 3(38) fiduciary, 3(21) fiduciary, and non-fiduciary broker. You will need to determine which is best for your plan based on your needs, budget, and goals. Don't take for granted the status of your advisor based on the term they use, or misuse, instead review your agreement with them

Comment   |  Flag   |  Mar 30, 2012 from Bethesda, MD

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james Level 9

The broker of record (broker) first loyalty is to their employer (broker-dealer) vs.advisor/fiduciary first loyalty is to their client. The broker is under a suitability standard vs. advisor/fiduciary is under a fiduciary standard.

Comment   |  Flag   |  Apr 01, 2012 from Chapel Hill, NC

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8 votes
George Cones, JD Level 20

Dear Jean,

I just wanted to add to the other good answers here. If your question involves a dispute or issue that has arisen, please consult an attorney.

In response to your question, fiduciaries have a higher standard of care than non-fiduciaries, and must avoid the appearance of conflicts of interest. ERISA sets out specific duties and prohibitions, but many of the fiduciary duties spelled out in ERISA apply in the non-ERISA context as well. Whether a broker or Registered Investment Advisor (RIA), it’s hard to go wrong if one acts solely in the interest of the client, but brokers have more leeway in that regard.

In practical terms, a big difference is liability. What may be a clear breach of fiduciary duty for the RIA, may not be actionable against a broker since they operate under a different standard of care.

As mentioned in the other answers an RIA, since his or her compensation is not based on commission, loads, and 12(b)(1) fees, may be less inclined to make decisions based on self-interest. More importantly, If one can show that the RIA acted in their self-interest, to the detriment of his or her client, there are likely grounds for redress, that may not be available against a broker.

Comment   |  Flag   |  Mar 31, 2012 from Wilmington, DE

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7 votes

One major difference is a broker cannot serve as an ERISA 3(38) investment manager to the plan. This leaves the plan sponsor alone in accountability for fiduciary issues regarding the investments in the plan.

Comment   |  Flag   |  Mar 30, 2012 from Green Bay, WI

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7 votes
James Holland Level 18

It does not compare, it is an apple and an orange. One works for themselves the other works for the participant and their beneficiaries. There are some very good answers above, I will add something to George's answer a Fiduciary does not need to aviod the appearance of conflicts on interest, they cannot have any conflcits of interest.

Comment   |  Flag   |  Mar 31, 2012 from Charlotte, NC

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7 votes

I have to just say thanks to all my fellow advisors who have answered this question so well. I just can't see why any plan sponsor whould not want to share their fiduciary responsibility with an advsior that is willing to take on that fiduciary role. As an independent RIA I love the feeling of knowing I am free from the need to sell anything. My advice is unbiased and not product or commission driven. Wake up business owners! Do not expose yourself to risk that you can avoid or at least share with a professional that is up to the task. Even small plans can benefit from having a fee-based advisor working in the capacity as a fiduciary.

Comment   |  Flag   |  Apr 01, 2012 from Loveland, OH

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3 votes

The short answer is:

The key issue is whether or not a firm is willing and able to accept fiduciary status in writing, legally binding themselves to act only in the best interest of the client.

The long answer is:

A "broker of record" is another way of saying "broker". Brokers have a legal relationship and primary duty to their brokerage firm that is placed ahead of the duty to their clients. Note that some brokers call themselves "advisors" or "consultants", which can be confusing or misleading to their clients, because those terms are often erroneously interpreted by clients as being an indicator of alignment of interests or objectivity. In other words, brokers have conflicts of interest.

In other words, brokers don't have the same standard of care that is required of fiduciary advisors.

Generally, brokers can't and won't accept "fiduciary status", and especially not in writing, which means that they won't agree to act only in the best interest of their clients. Some brokerage firms, however, are starting to create divisions/roles that can accept fiduciary status, however it is not always clear what level of fiduciary status is provided in those cases.

For example, brokers cannot accept 3(38) status, but some brokers will hold themselves out as being 3(21) advisors. However, this does NOT guarantee they are acting as fiduciaries. The plan sponsor firm’s fiduciary liability will be judged by ERISA, in the end, based on the actions of the “advisor”, not how they label themselves and what they claim to be/do.

As additional background, a 3(21) advisor provides recommendations to a plan sponsor, which requires the plan sponsor committee to have greater investment expertise, and it leaves more fiduciary liability in the hands of the plan sponsor, since in such a case the plan sponsor/committee makes all final investment decisions. In a 3(38) arrangement, the plan sponsor delegates certain investment decisions to the advisor. This/3(38) reduces plan sponsor liability (but not ultimate responsibility), and essentially shifts plan sponsor fiduciary responsibility from monitoring the investment structure, to monitoring the 3(38) advisor to ensure that the advisor is appropriately handling and monitoring the investment structure and doing their job properly. ERISA more concerned with process than specific results, and a well-designed process generally leads to reasonable results.

As an aside, note also that some non-broker advisors have conflicts of interest too (those that sell products/earn commissions, rather than having a transparent fee-only structure).

Alternatively, fee-only non-broker fiduciary advisors, whether 3(21) or 3(38), not only agree to act in the clients best interests, but are legally obligated to do so. Interestingly, not all fee-only advisors are willing to agree to fiduciary status in writing (even if that doesn’t reduce the advisor’s legal liability).

Many plans sponsors are not aware of these distinctions, and as a result increase their fiduciary liability and risk by hiring a non-fiduciary advisor or broker, and usually also increase their costs, sometimes hidden costs, in the process. The quality of the investment structure is usually also impacted as well.

For most plan sponsors that understand this difference, the first and easiest screening question in an RFP process is: "Will you accept fiduciary status in writing, and bind your firm and all of its professionals to act only in the best interests of the client at all times?"

Comment   |  Flag   |  May 02, 2014 from San Francisco, CA

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1 vote

It's a legal requirement. But really, do you trust your advisor and do they truly offer a value add proposition.

Comment   |  Flag   |  May 07, 2014 from Everett, WA

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