Putting Your Interests First
Brokers vs. advisers.
Are financial advisers legally required to put your interests ahead of their own? It depends on whether they are brokers or registered investment advisers. Different sets of laws apply to these two types of professionals, even though brokers and advisers sometimes do the same thing. Unfortunately, it's not always clear which one you're dealing with.
The duty to put clients' interests first, known as a fiduciary obligation, applies to advisers and is a fairly strict requirement in the eyes of the law. The law regards the job of adviser as a position of trust, and requires those with a fiduciary obligation to disclose all conflicts of interest and to act with a heightened sense of duty toward clients. The job of a broker, however, is considered transactional -- to make a trade on your behalf -- and comes with a more limited set of legal obligations.
The difference between the two used to be apparent in the way each got paid. Advisers charged a fee for managing your investments, usually based on the value of the assets in your portfolio. Brokers charged commissions on trades they made on behalf of clients. But many brokers have traded commissions for fee-based compensation, muddying the waters. Must fee-based brokers adhere to the stricter standard that applies to advisers? Yes, in some cases, but the line isn't clearly drawn.
Mary Schapiro, head of the Securities and Exchange Commission, is aware of the confusion and says that the SEC might recommend creating a single standard that applies to advisers and brokers. In the meantime, the only sure way to know who you're dealing with is to closely question the person handling your money. Those who must meet the higher standard consider it a selling point and will probably be happy to say so.