What Must Your Financial Advisor Tell You? You Might Be Surprised.

June 13, 2019


wealth & estate planningYou place great trust in the person who helps you invest your money. You like them, listen to them and are sure that they are obligated to do only what is best for you at all times. Think again! The obligations this person owes are actually dependent on how they are licensed. And some of those very obligations are in the process of being changed even as you read this.

Generally speaking, there are two kinds of professionals involved in assisting others with the investment of their life-savings. The first is the traditional stockbroker (a registered representative of a broker- dealer), who often works on commission when they buy or sell a product for a client. These brokers are licensed and regulated by the Financial Industry Regulatory Authority (“FINRA”) and the Securities Exchange Commission (“SEC”). The second is an investment adviser or RIA who is only regulated by the SEC. Adding to the confusion is the fact that most Wall Street firms have individuals in each category. Why, you may ask, does any of this make a difference to me?

Well, were you aware that the obligations owed to you by your investment professional directly depend on the manner in which they are licensed? Historically, an RIA was required to continually monitor a client’s account with a permanent obligation to act in accordance with what is good for the client. This has often been call a “fiduciary” standard. However, a stockbroker was only required to make recommendations that they believed to be suitable for the client at the time of the recommendation. In other words, a stockbroker had no duty to either make the recommendation they thought was “best” for the client or to continually monitor an account – “recommend it and forget it” was perfectly appropriate (though not very good client service). As long as the product generally met the investor’s goals and risk tolerances, the stockbroker met their legal obligations – even if the specific recommended product cost more or generated higher fees for the broker than a comparable investment. Surprised?

The SEC recently stepped into the fray and attempted to tighten and clarify the standards for a stockbroker (in a concise, 771-page rule). On June 5th, the SEC issued a new “best interest” rule requiring that a stockbroker generally put their customers’ interests ahead of their – or their employers – interest.  Specifically, a broker will be required, among other things, to disclose all key information including any potential conflicts of interest inherent in a recommendation (including fees and commissions) and the entity will need to develop methods to ensure compliance with the new rule. The rule applies to any recommendations for “any securities transaction or investment strategy involving securities.” This new standard specifically defines what it means by “best interest.” At the time of the recommendation, all material facts relating to interactions such as fees and conflicts must be disclosed. If the broker has taken “reasonable care” to understand and recommend the investment/strategy, and there are policies, procedures and compliance mechanisms in place to make sure the rule is followed, then the standard for “best interest” is being met. The rule requires broker-dealer compliance by June 30, 2020.

Meanwhile, your neighborhood investment advisor must still adhere to the fiduciary standard of care. This is a stricter standard implying that the advisor must act in the interest of the client at all times. Paraphrasing that famous philosopher, Kenny Rogers, an investment advisor must consider, and let you know when to hold, when to fold, when to consider walking away and when you should run.

Understand these obligations when choosing a person or entity to assist you with investment advice, strategy and implementation. Who you choose directly impacts the type of advice that is required to be given to you, and your rights if something untoward happens.

If you have any questions, please reach out to Brett Krantz at bk@kjk.com or 216.736.7238, or contact any of our Securities or Wealth & Estate Planning professionals.


KJK publications are intended for general information purposes only and should not be construed as legal advice on any specific facts or circumstances. All articles published by KJK state the personal views of the authors. This publication may not be quoted or referred without our prior written consent. To request reprint permission for any of our publications, please use the “Contact Us” form located on this website. The mailing of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. The views set forth therein are the personal views of the author and do not necessarily reflect those of KJK.