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Stockbroker/Dealer or Registered Investment Advisor?
The Wall Street Journal’s recent article about the obligations of stockbrokers to their clients highlighted the differences in the definition of a stockbroker or dealer and a financial advisor. In 2005, the Securities and Exchange Commission (SEC) adopted a new rule intended to help define these differences and to clear up some of the “gray” areas between the two roles. The most important regulatory differences relate to fiduciary duties. Some financial groups have stated that the SEC’s new rule is still not clear and that interpretations of the rule are vague and subject to too many variations.
A stockbroker is required to register with the National Association of Securities Dealers (NASD), while an investment advisor must be registered with the SEC. Under defined duties and regulations, stockbrokers or dealers are required to recommend “suitable” investments to clients and are not obligated to find the best investments for a client. Investment advisors, however, must uphold a “fiduciary” standard, which means they should always seek investments that are in the best interest of the client. The designation of financial advisor, which in theory provides clients with more legal protections, does not necessarily mean that the clients will receive better financial advice.
Some individuals are registered as both brokers and investment advisors, allowing them to act in both roles. This makes it difficult for a potential client to know when the individual is acting in which capacity and what their specific responsibilities include, especially with regard to fiduciary duties. Before working with a stockbroker, it is important that the potential client discusses and receives in writing the level of legal responsibility the broker holds and to clearly establish the fiduciary relationship. A registered investment advisor has a fiduciary duty if they have received compensation for services by a registered investment company or by the security holder, even if such an agreement was not in place at the time of the original investment.
An investor, or client, may bring legal action against an investment advisor, or any affiliated person of such investment advisor, or any other person who has a fiduciary duty concerning such compensation or payments, for breach of fiduciary duty if they do not believe that the advisor has upheld appropriate standards.
If it is proven that the advisor did not uphold their fiduciary duties, that person may be prohibited to act in any or all such capacities, either permanently or temporarily. The courts can also award financial damages or relief against the financial advisor and, in some cases, the investment company where the advisor was employed, if they did not follow specific guidelines. The awards of any financial damages are limited to the actual loss that resulted from a breach of fiduciary duties.
Over the past few years, professional liability insurers have reported higher incidents of breach of fiduciary duty claims. Some of these have been attributed to scandals involving large accounting firms, financial institutions and corporations. If investment advice provided by a broker to purchase certain investments has caused losses to an individual because it was inappropriate advice according to their personal investment profile/goals, the consumer should immediately contact an attorney for guidance.
