Are there factors that affect the quality of financial advice you gain from different sources? Congress and the regulatory agencies that oversee financial services think so. As part of the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the Securities and Exchange Commission (SEC) is undertaking a six month study to gauge the results of the bill’s provision differentiating the role of brokers providing investment products to customers vs. financial advisors who provide investment advice. This means more to you, the investor, than simple semantics. And acting on the difference may have a major impact on the results of your investment portfolio and financial planning.
A broker or registered representative who offers securities such as stocks, bonds and mutual funds to the public is bound by rules of suitability. This means that a broker can offer securities to you the investor after determining that 1) you can afford to make the investment and 2) the risk seems suitable for you. There is no requirement to determine if it fits into your overall financial plan or even if you have a financial plan. There is no requirement to determine if that particular investment being sold fits into your overall investment portfolio or strategy or if you even have a portfolio or strategy.
By contrast, an advisor must act as a fiduciary, per the new law, and determine if the proposed investment is appropriate to your goals, family situation, time frame, risk tolerance level and means. That advisor must consider how the investment fits within the existing portfolio and if it’s in keeping with your investment strategy. In short, the advisor works in your best interests and not for those of the investment firm or product manufacturer.
It is a sad commentary based on our experience and observation that the general public does not differentiate between a knowledgeable product sales person and an advisor working in the best interests of the client. The product person is not evil, but he or she is there to move the product out in to the hands of the investing public, often on commission or similar volume of product formula. The true advisor works for the client on a fee basis and is free to choose from all available investment opportunities. Yet the public, to its own detriment, often sees no difference among the broker selling product manufactured by the broker’s company or the insurance salesman who sells mutual funds as an added product and lumps them all under the misnomer of “advisor.”
We are very happy that Congress and the SEC are now making that distinction for the public and predict you will hear much more of this over the ensuing months.
We chose the path of Certified Financial Planner (CFP) away back in 1981 and have always striven to practice and uphold the ethical provisions of that profession that, in sum, means we work in the best interests of the client. We thank our clients for the trust they have placed in us as a result.
Robert Fragasso is the Chairman and Chief Executive Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at firstname.lastname@example.org. Robert can also be reached for comment at 412-227-3200.