Investment Advice

Nearly half of U.S. households have invested in stocks or mutual funds. This has given increased importance to the role of financial professionals who offer advice. However, not all professionals may ultimately provide advice appropriate for their clients’ risk tolerance and financial goals—whether because of insufficient training or conflicting financial incentives. 

Polls repeatedly demonstrate that Americans believe financial professionals offer advice, not sales. They expect that financial professionals who provide financial advice should put the interests of their clients ahead of their own. They also expect those professionals to disclose up-front any fees or commissions they earn, as well as any conflicts of interest. 

Individuals offering financial advice may market themselves as professionals yet operate as salespeople. Many people use titles like “financial advisor,” “financial planner,” and “personal financial consultant” to gain an advantage over other sales professionals. The use of these designations is unregulated. Many such professionals have met no minimum standard requirements. Investors are often unaware of this. Many state securities and insurance regulators do not allow a financial professional to use a designation, including one with “senior” in the title, unless it has been accredited by the American National Standards Institute or the National Commission for Certifying Agencies. The accreditation requirement is designed to ensure that the credential is legitimate. 

In addition, those who sell investment products must be licensed or registered. These people use titles including “broker,” “registered representative,” “investment advisor,” and “insurance producer.” Brokers are not required to register under the Investment Advisers Act if their advice is “incidental to brokerage activities.” 

In general, investment advisors who manage $100 million or more in client assets must register with the Securities and Exchange Commission (SEC). In most cases, those who manage less than $100 million must register with the state securities agency in the state(s) where they do business. 

The SEC examines investment advisors who are SEC-registered. The states are required to examine investment advisors who register under state law. 

Independent investment advisors owe a fiduciary duty to their clients. They must act in their clients’ best interest. They must also properly disclose fees and other expenses, as well as any compensation the advisor may receive from sources other than the client. 

Brokers and dealers, on the other hand, are held to a weaker standard. Their recommendations must be suitable to meet the client’s needs, but they do not need to put their clients’ interests first. They are not required to disclose other compensation received, including commissions. 

In 2019, the SEC finalized Regulation Best Interest (Reg BI). Reg BI generally requires both broker-dealers and investment advisors to establish procedures that identify and mitigate potential conflicts. It also creates a new disclosure form, the Client Relationship Summary (Form CRS), providing information about fees, conflicts, and the applicable standard of care. However, Reg BI does not create a fiduciary standard for financial professionals, and disclosure testing suggests that investors may not fully understand the material presented on Form CRS. 

The Financial Industry Regulatory Authority manages a database of broker-registered representatives. The database lists complaints against representatives as well as other information. It also discloses the nature and resolution of those complaints. Information about investment advisor representatives who are dually registered as broker representatives can also be found there. The SEC manages a similar database on representatives of investment advisors registered with the commission. Investors must depend on individual states for information on the representatives of state-registered investment advisors.