According to Consumer Reports, many consumers do not understand the crucial differences between brokers and registered investment advisors, and how that distinction could have a big impact on their wallets.
In a September 2013 article addressing some of the critical money mistakes people make, Consumer Reports Money Adviser said one big mistake is buying into the myth that “if my broker recommends a stock, mutual fund, or other security, she has my best interests in mind.”
According to Consumer Reports, what you may not know could definitely hurt you:
“Brokers are required to follow only the ‘suitability’ standard. … But they don’t have to observe the stricter ‘fiduciary’ standard, which requires professionals to put your interests above their own and to disclose any potential conflicts of interest. That means their recommendations might be based on the size of the commission they can earn.”
In contrast, advisors like Adam Financial Associates, Inc. are RIAs (or Registered Investment Advisors), and must operate under the stricter “fiduciary” standard.
One thing is clear. The fiduciary standard sets the professional bar much higher.
Financial advisors are divided into two camps. “On the one side are the banks, brokerages and insurance companies whose business models include use of sales commissions and other practices that can create conflicts with clients’ interests. On the other side are the registered investment advisers, who are already held to a fiduciary standard that obliges them to act always in their clients’ best interests,” wrote Corrie Driebusch of the Wall Street Journal in July.
Here’s a valuable tip from Consumer Reports:
Before hiring an investment professional, ask them whether they operate under a fiduciary standard so you can make sure they put your interests first.