Typically, it is not too hard to find an advisor willing to give you investment advice.   But, when it comes to the standard of care for clients, are all investment advisors equal?  In short, the answer is no.

What is a Registered Investment Advisor (RIA)?

Registered Investment Advisors (RIAs) are investment advisory firms that must register with, and agree to be regu­lated by, the U.S. Securities & Exchange Commission or, in the case of RIAs with less than $100 million in assets under management, state securities regulators.

Most RIAs cater to high-net-worth individuals, family offices and retire­ment plans.  Many RIAs are formed by former employees of large banks and brokerage firms. The allure of these investment professionals is the opportunity to leave corporate America for the freedom and flexibility to set up smaller, independent businesses where they could more closely align their services with their cli­ents’ needs.

A Registered Investment Advisor must operate under and adhere to a fiduciary standard of care.  This standard requires RIAs to act in a manner that is always in the client’s best interest.   In fact, RIAs are legally obligated to act in their clients’ best interests, even if that runs counter to the firm’s own interests.  In addition, every RIA must disclose all forms of compensation and any conflicts of interest in writing.

While other types of advisors may choose to adhere to similar standards, or say that they do, RIAs remain the only advisors that are legally obligated to do so.

The Fiduciary Standard

In June 2009, the Committee for the Fiduciary Standard was formed to define the “fiduciary standard.” This group of investment professionals and fiduciary experts advocated that all investment and financial advice be rendered as fiduciary advice and meet the requirements of five core fiduciary principles:

  1. Put the client’s best interests first
  2. Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
  3. Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
  4. Avoid conflicts of interest
  5. Full disclose and fairly manage, in the client’s favor, unavoidable conflicts

Why Aren’t All Investment Advisors Required to Act in Their Client’s Best Interest?

This seems like common sense but, unfortunately, this issue is currently the subject of considerable debate. There are legislative and regulatory efforts underway that would require all financial advisors to adhere to the fiduciary standard but, not surprisingly, it is being met with fierce resistance from Wall Street (i.e. the large brokerage firms, mutual funds, etc.).

Why would Wall Street resist something that makes so much sense?   The reason is simple:  there are billions of dollars of fees and profits at stake for them.

Until such time that the fiduciary standard of care applies equally to all investment advisors in the U.S. – and not just RIAs – it is prudent, and in your very best interest, to look at the services a Registered Investment Advisor can provide.

To learn more about Matt DiGennaro, view his Paladin Registry profile.