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Thomas M. Geier, CPA, CFP®, PFS

One question we are frequently asked to explain is the difference between our registered investment advisor firm and a brokerage firm.  The main distinction is in the term “fiduciary”.

The Securities and Exchange Commission, who oversees registered Investment Advisers under the Investment Advisers Act of 1940, defines the role as follows:

“As an investment adviser, you are a ‘fiduciary’ to your advisory clients. This means that you have a fundamental obligation to act in the best interests of your clients and to provide investment advice in your clients’ best interests. You owe your clients a duty of undivided loyalty and utmost good faith. You should not engage in any activity in conflict with the interest of any client, and you should take steps reasonably necessary to fulfill your obligations. You must employ reasonable care to avoid misleading clients and you must provide full and fair disclosure of all material facts to your clients and prospective clients.”

Fiduciary vs. Suitability

So, all registered investment advisors carry a fiduciary obligation to their clients. This is not the case with stockbrokers. Instead, the non-fiduciary stockbroker is overseen by FINRA (Financial Industry Regulatory Authority) and must only follow the standard of “suitability,” which does not require the client’s interests be placed first.  Stockbrokers must provide suitable advice given the client’s resources.  Stockbrokers tend to be much more transactional than an RIA, with an emphasis is on securities products.  RIA’s usually are paid via fees where stockbrokers historically have charged commissions.

You may have heard about the U.S. Department of Labor’s fiduciary rule that would have impacted all financial advisors, including stockbrokers, and their clients. Simply stated, the DOL’s new “fiduciary duty” standard would have required financial professionals who receive compensation for transactions to act in their client’s “best interest.”  However, the U.S. Fifth Circuit Court of Appeals struck down the Labor Department’s new fiduciary rule and issued a mandate saying that the agency exceeded its authority in promulgating the rule.

The DOL’s rule and related exemptions would have required all retirement advisors –whether fee or commission-based –to adopt and practice a fiduciary standard that puts their clients’ best interests first and foremost.  And retirement advisors would have had until 2018 to acclimate to this new fiduciary rule.

According to the National Law Review, the final rules would have likely impacted broker-dealers the most, Registered Investment Advisors (RIA) the least, and with insurance companies somewhere in the middle.

The new rule would have meant that financial advisors–for the first time –would have had to provide full transparency around the fees and commissions they charged retirement plan advice and products. And illustrating the importance of fees and how small differences can add up, the DOL even provided the math: “A percentage point lower return could reduce savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period; after adjusting for inflation, it would be just over $27,500.”

Although the DOL Rule was struck down, it did generate a tremendous amount of press and resulting education for consumers regarding the term “fiduciary”.   The Securities and Exchange Commission has expressed interest in creating its own fiduciary rule and was authorized to create one when the Dodd-Frank Act was passed in 2010.  We’ll have to wait and see what comes of it.

In the meantime, Geier Asset Management would be happy to discuss our own commitment to our undivided loyalty and utmost good faith in our relationship with you. Contact us today. 

Sources: eMoney ABM.

© Geier Asset Management, Inc.  Sep 2018.   Thomas M. Geier is a Vice President of Geier Asset Management, Inc., a Registered Investment Advisor.   The above blog reflects the opinions of Mr. Geier and not necessarily the firm.  Any advice given is general in nature and investors must consider their circumstances.  Past performance is no indicator of future performance.