Choosing a Financial Advisor (Step One)
Jul 08 2009
As some of the financial turmoil slows down (we hope), you might be thinking that you need the help of a financial advisor or that you might need a new financial advisor. You may not know it, but just about anyone can call themselves a financial advisor or some variant of that term – financial planner; wealth advisor; etc. But there are some differences between them. Today, I’ll examine a very important part of that…”standard of care” and how it affects you.
There are basically, two different types of financial advisors: Registered Representatives and Registered Investment Advisors (RIA).
Registered Representatives are regulated by FINRA (Financial Industry Regulatory Authority) and they are normally associated with a Broker/Dealer – commonly called a Stock Broker.
On the other hand RIAs are regulated by the SEC (Security and Exchange Commission) or the State Government depending on the size of the firm. Generally speaking, RIAs operate independent of any Broker/Dealer, though they may still place trades through a Broker/Dealer. These two different types of advisors have different “standards of care.”
A Registered Representative must meet what is known as a Standard of Suitability. What this means, in essence, is that a recommended investment must be appropriate for your goals and risk tolerance. Expenses or fees do not necessarily enter in the equation. In fact, a Registered Representative can recommend one suitable investment over another, even if he makes more money off the recommended investment.
A RIA is required to meet a Fiduciary Standard which is generally accepted as acting in the client’s best interest. A RIA cannot make a recommendation that benefits him at the client’s expense. Again, a Fiduciary must always act in the client’s best interest.
This is all a little confusing, and it may not be easy to tell if you are dealing with a Registered Representative or a RIA (although if you ask, a potential advisor should tell you). If after asking a financial advisor if he is a Registered Rep or RIA you are still confused a questionnaire that I recently received may help you sort it out. (Disclosure: I received the questionnaire at a NAPFA conference. NAPFA promotes fee-only financial planning and a fiduciary standard). The questionnaire was provided by John Ritter of Ritter Daniher Financial Advisory, LLC in Cincinnati OH. I’d recommend you ask any potential financial/wealth advisor/planner these questions before you start a planning engagement.
1) Are you held to a fiduciary standard in all dealings with me and my financial affairs?
2) Do you disclose all conflicts of interest, both actual and potential, that exist or might exist in my relationship with you?
3) Do you forego any type of commission-based compensation in favor of receiving all compensation via fees that are fully disclosed in dollar terms?
4) Do you provide full service, comprehensive financial planning services as well as investment advisory services?
5) If you provide full service, comprehensive financial planning services, are these services performed by individuals that have obtained the Certified Financial Planner (CFP®) certification?
While neither designation as a registered representative or RIA guarantees competence, knowing the “standard of care” may help you choose amongst various advisors. If you have further questions on what a fiduciary standard means, check out the following website: http://www.focusonfiduciary.com/.
NOTE: Since drafting this article, the administration has introduced legislation in Congress that will require both registered representatives and RIAs to meet a fiduciary standard…we’ll see how it works out.
