In a nutshell, some “advisors” manufacture and sell financial products. Others are legally bound to provide investment advice that serves the clients’ best interests, not their own.
Understanding the differences between the two is critical.
Broadly speaking, three main regulatory regimes cover the U.S. financial industry: the SEC and its state counterparts; banking regulators; and watchdogs over brokers and insurance agents.
The first group we will discuss is advisors made up of brokers and insurance agents. Brokers do business under the Securities and Exchange Act of 1934 and are self-regulated by the Financial Industry Regulatory Authority (FINRA). Insurance agents are governed by state insurance regulators. Brokers and insurance agents have no fiduciary duty. Instead, they operate under the less-strict standard of suitability.
This means that brokers and insurance agents’ obligation is limited to reviewing a client’s financial needs, objectives, and unique circumstances before providing advice or making investment recommendations that are suitable.
It is good to know whether your advisor is required merely to act in a manner that could be defended as “suitable” in light of your goals and objectives, or if the advisor is required to act purely in your best interest.
Investment advisors are registered with the Securities and Exchange Commission (SEC), or with state securities regulators if they manage less than $100 million. They are governed by the Investment Advisors Act of 1940. Investment advisors have a fiduciary duty to their clients—a legal obligation to act in their clients’ best interests at all times. Fiduciary duty is a well-established legal principle backed by decades of precedent.
Trust companies (and bank trust departments), such as Trust Point, incorporate the same standard of fiduciary duty in their relationships with clients. Their regulators may include, but are not limited to, state banking authorities, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, or the Federal Deposit Insurance Corporation (FDIC).
In addition to the legal obligation to put their clients’ interests ahead of their own, fiduciaries also must adhere to defined duties of loyalty and care; they must provide up-front disclosures to a client before an agreement is signed; and they must either eliminate conflicts of interest or fully disclose any unavoidable ones.
