Advisors follow the Fiduciary Standard which was established within the Investment Advisors Act of 1940. The U.S. Securities and Exchange Commission (SEC) Fiduciary Standard requires advisors to act in the best interest of the client – specifically stating that they must put their clients’ interests above their own. It requires higher standards and is more stringent than the suitability standard. Advisors are normally paid a fee that is a percentage of assets.
A Broker is defined by the SEC as “any person engaged in the business of effecting transactions in securities for the account of others.” Brokers follow the suitability rule which states that a Broker needs to believe that recommendations given are consistent with the interests of the client’s financial needs and circumstances at the time. The rule does NOT set standards around conflicts of interest or a need to place clients’ interests before one’s own — this leaves room for conflicts to arise between a Broker and client. One of the biggest conflicts concerns commissions paid to the broker for managing investments in the company’s fund offerings. Brokers are paid via commissions per transaction.
Unfortunately too many people use the terms advisor (fiduciary) and broker (salesman) interchangeably which blurs the stark differences between the two. In most cases it is preferable to work with a financial professional that is both a broker and advisor. One of the reasons it is important to know whether the planner you are interviewing is an investment advisor, broker or both is because not all products make sense to be charged a commission or a percentage of assets. It is in your best interest to make sure your financial planner has the flexibility to charge a commission when it makes sense and fee based on the percentage of assets managed when it makes sense. The Gharib Group takes the role of fiduciary seriously and holds each member to the fiduciary responsibility, period.