Financial Adviser vs. Investment Adviser: What’s the Difference?
A couple of years ago the Securities and Exchange Commission commissioned a survey to determine if the investing public was aware of the difference between an investment adviser and a broker/dealer, whose sales representatives often identify themselves as “financial advisers.” To those of us who are in contact with those investors it was no surprise when the survey revealed that the vast majority of individual investors did not know there was a difference.
Investment advisers are registered under the Investment Advisers Act of 1940 and required to provide objective, fiduciary investment advice to their clients. They are not only subject to more strenuous regulatory requiements, but are fully liable for their advice and actions on behalf of a client. “Financial advisers” operate under the laws governing the sale of securities and are only held to a vaguely defined standard that requires an investment to be not-unsuitable to the customer. There is a world of difference between an investment adviser and a financial advisor.
The magic word that defines the difference is Fiduciary. A “financial advisor” is generally licensed as a securities salesperson but in some cases is only licensed to sell insurance. One of the things that such salespersons vigorously avoid is any language or action that would cause them to become a fiduciary. The American Heritage Dictionary defines “fiduciary” as “A person who stands in a special relation of trust, confidence, or responsibility in his obligations to others.”
A fiduciary is, by definition, legally obligated to work in the best interest of the person or organization by whom he or she is employed. A fiduciary is obligated to whenever possible avoid conflicts of interest, and if a conflict is unavoidable to fully disclose it to the person or organization who has entrusted the fiduciary with responsibility.
Does that make a fiduciary an expert? Not at all. There are two kinds of person who are dangerous to an investment portfolio. The first is the honest and sincere but incompetent agent. The second is the fully competent and qualified person who is primarily loyal to someone or something else. Of course, when a person is both incompetent and focused on enriching themselves or a corporation that is a double whammy!
Being a fiduciary at least eliminates one of the issues. The competence issue is another area where a wise investor will pay attention. With regard to financial planning and investment management the requirements for certification, continuing education, and fiduciary performance are most strenuous for the Certified Financial Planner (CFP®), Certified Financial Analyst (CFA®), and Certified Investment Management Analyst (CIMA®) designations. For income tax and accounting advice, the gold-standard is the Certified Public Accountant (CPA).
If a person or firm has taken the time and trouble to register with state and/or federal regulatory agencies as a fiduciary adviser then at least that declaration indicates a willingness to be held to a regulatory standard. While there is no legal reqirement for a person providing investment advice to have a certification, obtaining one of the more strenuous certifications indicates that the person rendering the advice has met at least the minimum requirements to apply the needed body of knowledge to your portfolio or situation.
Recent Newsletters
December 31, 2010 TPWC Newsletter
The letter is in .pdf format and is best read using Adobe Reader. If you don’t have the curent version you can get it at: http://get.adobe.com/reader/
As always your comments and/or questions are welcome.
Jeff
Market & Economic Update
September 23, 2010
The Recession is Over (and Has Been Since June 2009)
The End Was Then
In a formal announcement, the National Bureau of Economic Analysis (NBER) proclaimed the so-called Great-Recession to be over. More, they determined that it actually had ended last June, and somehow no one noticed!…
Bull Market Blues
Investors Flee as Market Rises
As I write this on September 23, toward the end of a month noted for the worst average performance in the U.S. equity markets, the Dow has risen to 10,748 and the S&P 500 to 1,135 mid-day. Not counting dividends, my simple math tells me that the Dow has risen about 64% and the S&P 500 about 68% since the market bottom back March of 2009. Over that same period the Investment Company Institute (ICI) reports that equity (stock) mutual funds have had $145 billion dollars more liquidations than deposits. Meanwhile, bond funds have received about $594 billion more than
was paid out…
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