When you engage a financial advisor, you are entering a partnership that can affect your financial health for a very long time. Knowing exactly what your advisor does and who they really work for is crucial to protect yourself from risk and fraud.
What Type of Advisor Are They?
The term “advisor” covers a broad range of services that are regulated and compensated differently:
Brokers are individuals or firms that charge fees or commission for buying and selling assets on your behalf. Depending upon which state you are in, a broker does not always act as a fiduciary.
Missouri’s Supreme Court says that: “stockbrokers owe customers a fiduciary duty. This duty includes at least these obligations: to manage the account as dictated by the customer’s needs and objectives, to inform of risks in particular investments, to refrain from self-dealing, to follow order instructions, to disclose self-interest, to stay abreast of market changes, and to explain strategies.” 
In Kansas, whether or not a fiduciary relationship exists depends on the facts and circumstances of each individual case. The Kansas Supreme Court hqs found that a fiduciary relationship can exist when created by contract, and also when a special relationship is implied by law due to the factual situation surrounding the transactions and the relationship of the parties to each other. When a consumer places trust and confidence in their broker, and lacks the investment knowledge and sophistication held by the broker, a fiduciary relationship can exist.
Brokers must register with the Financial Industry Regulatory Authority (FINRA) where you can search for an individual’s name and research their certifications, education, and see if any enforcement actions have been taken against them.
Investment advisors are professionals who offer financial guidance in the form of products, services, planning and advice. Some have completed extensive training in long-term financial roadmaps such as a certified financial planner (CFP) while others may be insurance agents, accountants, attorneys, or employees of large brokerage firms. It is important to know your advisor’s specialty (if any) and match their primary skills to your needs.
Financial Advisors are required to meet a fiduciary standard that places client interests ahead of their own at all times. You can find and research advisors at The SEC’s Investment Advisor Public Disclosure (IAPD) site.
Note: Advisors can be registered as both a broker and an investment advisor (this will be disclosed in the information provided at the sites listed above). If your advisor is dually registered, you need to be aware that this may mean they are not acting as a fiduciary in all circumstances.
How Are They Paid?
Knowing how your advisor makes their money is key to understanding how they will relate to the recommendations they are making.
Compensation is based on the sale of specific products (such as mutual funds, annuities, etc.) that rewards the advisor for recommending the product. Some larger brokerage and advisory firms may also offer revenue-sharing payments from fund managers in exchange for marketing and selling them. Revenue-sharing won’t impact a client’s fund directly, but can be seen as a possible influence on the advisor.
Compensation is received through flat fees, hourly rates or a percentage of the assets you ask them to manage. They do not receive commissions or fees based on the products they sell and their only income is provided by the client. This is generally regarded as the most consumer-friendly arrangement with the fewest conflicts of interest.
Despite the similarity in name, a “fee-based” advisor means they could also earn commissions or compensation from third parties in addition to hourly or flat fees you might pay.
Be sure to ask your advisor how they are compensated for the products they recommend. If they are not forthcoming about how they benefit from their advice to you, steer clear.
What Conflicts of Interest Might Come Up?
Finally, you will want to understand what other factors may influence an investment firm to direct their advisors towards certain recommendations. You can research these potential conflicts by going to the IAPD website, searching by “Firm”, and then click either the “View latest Form ADV filed” button or the “Part 2 Brochures” button. Firms are asked to report conflicts that they are aware of to allow their customers to evaluate service as it is being provided. An example of a conflict included in a typical Firm Brochure might be:
In certain instances, offers a fee alternative in the form of specifically negotiated performance fee arrangements… The ability to earn incentive compensation creates the potential for conflicts of interest including that, where charges a performance fee, it may have a financial incentive to make riskier or more speculative investments for accounts paying such fees… has adopted policies and procedures with respect to, among other things, the allocation of investment and trading opportunities, which believes are reasonably designed to mitigate these and other conflicts associated with such “side-by-side” management.
Securities Litigation Specialists
We would be interested in talking to you if your financial advisor or stockbroker:
- Lost your money on bad investments;
- Made promises he couldn’t keep;
- Put his interests ahead of yours;
- Didn’t tell you about conflicts of interest;
- Didn’t plan a strategy around your particular needs and objectives;
- Didn’t inform you about the risks of your investments;
- Didn’t explain his strategies; or
- Charged you fees or commissions without telling you.
If any of these things happened to you, you may be entitled to compensation. The Law Office of Jared A. Rose The Law Office of Jared A. Rose has experience fighting and winning cases for investors. Contact us today at 816.307.0781.