By Craig Kirsner, MBA, Nationally-Recognized Author, Speaker, Retirement Planning Professional and President of Stuart Estate Planning Wealth Advisors
The trusted handshake concept is set to tighten up under a new SEC rule
The role of a broker-dealer is to offer secure financial advice and investment opportunities to clients. Both aspects of the job require different skills and responsibilities, the foremost of which are transparency and prioritizing the client’s interests. A broker-dealer earns a fee by making investments on others’ behalf, so it’s vital to know how and why they may recommend certain options.
The delicate relationship between a broker-dealer and their client can be highly beneficial. It can also be ripe for exploitation. The government’s regulating body is facing up to this unpleasant fact and proposing new rules to ensure broker-dealers collect their fees honestly.
Detailing the broker-dealer role
The NASDAQ Stock Market succinctly defines a broker-dealer as “any person, other than a bank, engaged in the business of buying or selling securities on its own behalf or for others.”1 These professionals play an important role in keeping the market liquid (fluid and active) by acting as a third party between investors and companies. Broker-dealers may handle several investment opportunities such as variable annuities, mutual funds, futures, and stocks.
The broker aspect entails helping clients buy and sell items like bonds, mutual funds, or stocks and collecting a commission for doing so (alongside a fee from the investor).
Some brokers may charge inactivity fees if you do not trade regularly. As dealers, they buy or sell securities from their own account. Dealers act as principals in this regard, rather than agents executing client orders (as when brokering). Acting as a principal means that it is the advisor’s own best interests which will likely take priority.
An unethical agent may make money by recommending unsuitable investments to clients, particularly those in retirement seeking to safeguard and increase their wealth. An unsuitable investment is defined by being inconsistent with an investor’s objectives, best interests, or risk tolerance (among many other factors).2 For example, advising a retired client who depends on investment income to sink a good portion of their portfolio into risky start-up stocks would likely constitute an unsuitable recommendation.
Some broker-dealers derive a significant portion of their profits via revenue sharing deals. In such circumstances an agent may sell an investor a certain fund and take not only their standard fee, but on top of that the mutual fund also pays the broker-dealer extra for selling it.3
Broker-dealers are not currently held to the same standard as registered investment advisors. This is an important distinction to be aware of, especially when it comes to considering how these professionals make their money.
How broker-dealers differ from registered advisors
A registered investment advisor is bound by the fiduciary standard which is derived from the Investment Advisors Act of 1940.4 This demands the highest level of fiduciary professional behavior. The advisor must work solely on their client’s behalf and in that client’s best interests. Registered advisors must act with complete loyalty and good faith, with due prudence and complete disclosure at all stages of the investment process.
So how are broker-dealers regulated?
Broker-dealers are affiliated with the Financial Industry Regulatory Authority (FINRA), a self-regulating organization that regulates registered brokers and their firms.5 FINRA offers its BrokerCheck resource to help the public vet potential advisors; investors can look up a specific broker or firm and see their employment history and status, whether any customer complaints have been filed against them, and the current disposition of those complaints.6
FINRA’s code of conduct dictates that any member or firm “..in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade,” nor shall any member “…effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.”7 8
FINRA enforces this standard through suspensions, fines, and permanent bans on certain brokers who violate its rules, as well as overseeing securities arbitration claims from investors.
While some rules, such as suitability, are well-defined, the tenets of fiduciary duty can be more ambiguous. This is something that may look to become a little clearer.
A safer partnership
Broker-dealers are also subject to the oversight of the Securities and Exchange Commission (SEC), which proposed a new rule in April of this year to better regulate conduct in the profession. Rule 15l-1, which falls under the Securities Exchange Act of 1934, as amended (Exchange Act), is also known as “Regulation Best Interest.”9 The proposal means tighter reins on the following areas of broker-dealer conduct:
- Full disclosure of the facts relating to the broker-dealer/client relationship
- The provision of care, diligence, prudence, and skill regarding recommendations
- Full disclosure or elimination of any conflicts of interest which may arise as a result of an investment recommendation
- All information provided to or collected from a customer must be kept on record for a minimum of six years
This rule adds up to a more secure experience for investors. It also spotlights just how crucial of an element trust is when dealing with your financial advisor.
Real wealth is earned and so is trust
No investment strategy can guarantee a profit or protect against loss in a period of declining values. This is one of the reasons why trust is so vital in the relationship between you and your investment agent. Professional judgement and experience coupled with a vested concern in your interests is often the only constant in an unpredictable economy.
The best financial advisor is the one who will steer you through retirement by focusing on the safety of your retirement portfolio and continued income, while working to minimize risk of loss. Always choose an investment team who puts your future first!
To learn more about how to invest wisely in retirement, come to one of our upcoming dinner workshops at Ruth’s Chris or Abe & Louie’s steakhouse in Boca Raton or Fort Lauderdale. Call 1-800-807-5558 for details or to RSVP.
- https://www.nasdaq.com/investing/glossary/b/broker-dealer
- http://www.finra.org/industry/faq-finra-rule-2111-suitability-faq
- http://www.cfma.org/content.cfm?ItemNumber=3543
- https://www.law.cornell.edu/wex/fiduciary_duty
- https://www.finra.org/
- https://brokercheck.finra.org/
- http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=5504
- http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=5513
- https://www.sifma.org/wp-content/uploads/2018/04/WilmerHale-Summary-re-Reg-BI.pdf
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors have not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to safety and security generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. 646880