standard of care

While at a recent get-together, a common question among the group was raised – “What’s the difference between an advisor and a broker”. After letting the group debate the topic for a few minutes, it was clear that this remains an area of continued confusion. It is no surprise that so much confusion exists. In the world of investment advice there is a very important, but commonly misunderstood distinction between the two; both of whom often hold themselves out to the public as “financial planners” and “financial advisors”. Registered Investment Advisors must adhere to a fiduciary standard. The fiduciary standard requires that investment advisors do what is in the best interest of their clients and that they always put their client’s interest before their own. There is no gray area in the fiduciary standard. Investment brokers are subject to a far less stringent suitability standard, which may be full of conflict.

What’s the Difference?

Registered Investment Advisors:

Registered Investment Advisors working under the fiduciary standard must adhere to the following rules:

• Must act in the best interest of their client
• They must put their own interests below those of the client
• Must execute trades on a “best execution” standard
• Must not buy investments in their own account before their client’s account
• Their duty of loyalty must always be to their clients

Investment Brokers:

None of the above fiduciary requirements apply to an investment broker’s suitability standard. In the eyes of the Securities and Exchange Commission, an investment broker’s job is to help disseminate investments brought to market by their brokerage firm. Most of the large Wall Street firms fall under this suitability standard. These firms often use their clients as a means to sell their own products. These products oftentimes pay higher commissions to the selling broker and are frequently more expensive and less optimal to the end-client. Brokers are typically incentivized to sell their firm’s investment products, which creates substantial conflicts of interest between the investment broker and their clients. More specifically, the suitability standard:

• Only requires that the advisor has to plausibly conclude that his/her recommendations are suitable. That is, the investment recommendation should not be unsuitable. Further, what is recommended does not have to be specifically in-line with your stated objectives and profile.
• Requires that transaction fees are not excessive
• Has less strict disclosure requirements for potential conflicts of interest between the broker and client

What is Stage Harbor Financial?

Stage Harbor Financial is a registered investment advisor and fully embraces being subjected to the more stringent fiduciary standard. Furthermore, all Stage Harbor advisors are all CERTIFIED FINANCIAL PLANNING™ Professionals, which comes with its own fiduciary standards. Stage Harbor takes this fiduciary responsibility very seriously as we believe trust is the most critical ingredient in building client loyalty and we never want to jeopardize this trust by putting our interests ahead of the interests of our clients. Therefore, you can be confident that as a client of Stage Harbor Financial, we will always do what is in your best interest, not ours. Connect with us to learn more.

Please click here for important disclosure footnotes.