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February 12, 2017

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February 12, 2017

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INVESTMENT PROFESSIONALS: DIFFERENT TYPES DIFFERENT OBLIGATIONS

Whether investing for a new home, college funding for a child or investing for retirement, creating a sound financial portfolio to suit a person's needs can be a daunting task. While some people are confidant investing on their own many others need help from an investment professional. Fortunately, there are thousands of people in the financial services industry ready to help. Unfortunately, finding the right type of investment professional can be just as confusing as finding the right mix of stocks, bonds and mutual funds. 

The three investment professionals most commonly used are stockbrokers, investment advisers and financial planners. Each one can offer much the same help but there are important distinctions. Understanding these distinctions will help match your client with the investment professional right for them.

Stockbrokers
The term stockbroker, broker, registered representative, or broker-dealer refers to people who are in the business of buying and selling securities on behalf of their customers. Sometimes they are called
financial advisers, financial consultants, or investment consultants. They are, first and foremost, agents who act for their clients. In addition to this transaction based business, many brokers now provide advice and guidance on specific investments. This advice based business moves them closer to the role of an investment adviser.

Stockbrokers are compensated in many ways. They may charge commissions for executing buy and sell orders for their clients. They may impose an annual asset-based fee that covers the cost of some or all of the transactions a client makes. They can also be compensated by the company whose product they are recommending. This is often the case with mutual funds they recommend. 

Investment Advisers 
The term Investment Adviser refers to people who get paid to give advice about investing in securities. Sometimes they are called investment managers, asset managers, wealth managers, or portfolio managers. They emphasize financial planning and recommend types of investments that fit into a customer's overall plan. Investment advisers may provide ongoing management and may continue to monitor their clients' portfolios and advise adjusting the holdings as needed. Typically, the client gives the adviser discretionary authority to make trades for him without having to first get approval for each transaction. 

Like stockbrokers, investment advisers are compensated in a number of ways. Most charge a fee based on a percentage of the assets in a client's account. Some will charge a commission if they are licensed to buy or sell the investment recommended for the client's portfolio. 

Financial Planners
Financial planners work with their clients to clarify their clients' financial goals, assess their risk tolerance and time horizon, and evaluate their overall financial situation. They then develop a financial plan, an investment strategy, and an asset allocation model. Finally, they then identify appropriate investments to implement the plan. A comprehensive financial plan typically covers such areas as: retirement and college planning, estate planning, tax planning, insurance needs, debt management and investing to meet other specific goals.

Financial planners also charge a fee for their services. This fee can be hourly or on a flat rate basis. Just like a stockbroker or an investment adviser, financial planners can charge commissions or a percentage of the assets in a client's account if they are licensed to do so.

The fundamental differences among stockbrokers, investment advisers, and financial planners are in the regulations that govern them and the legal obligations they owe to their customers. Because more often than not, all three investment professionals are engaged in both transaction based business and advice based business it is important to understand the legal obligations each owes to their customers.

Stockbrokers are the most regulated of the three investment professionals. They are regulated by the 1934 Securities Exchange Act and by the rules of the Self Regulatory Organizations ( SRO's ) such as the NASD, NYSE and the CBOE. In order to become a stockbroker a person must pass a comprehensive test. They may also have to pass an exam on state law, obtain other securities licenses, and must meet continuing education requirements.

There are detailed SEC and SRO rules that govern all aspects of a broker's business. One of the most important of these rules is that a broker must know his customers and recommend only investments suitable for their investment objectives and financial needs. Brokers are generally not considered to have a fiduciary duty to their customers although this duty might be applied in certain circumstances. Breaches of the “suitability” rule and breaches of fiduciary duty are two of the most common claims against brokers in NASD arbitration.
Investment advisers are regulated by the Securities and Exchange Commission ( SEC ) under the rules of The Investment Advisers Act of 1940. Advisers who manage assets of more than $25 million must register with the SEC as a Registered Investment Adviser ( RIA ) . Advisers who manage less than $25 million must register with state securities regulators in the states where they operate. The test they must pass in order to become registered and the regulations that govern them are far less onerous than those that apply to stockbrokers.
By law Registered Investment Advisers have a fiduciary duty to their clients. They have to put the interests of their clients ahead of their own and they have to recommend the best investments for the clients, not just suitable ones.

Registered Investment Advisers are also required to provide up-front disclosure to their clients. This disclosure is found in the Form ADV. The Form ADV has two parts. Part 1 has information about the adviser's business and whether they've had problems with regulators or clients. Part 2 outlines the adviser's services, fees, and strategies.

The least regulated of the three investment professionals is the financial planner. The term “broker” and “investment adviser” are legally defined terms. On the other hand, the term financial planner is not a legally defined term. It generally refers to a professional who develops a financial plan.

Currently, financial planners do not have to be licensed with the SEC, the NASD or the State of Illinois unless they are also stockbrokers or investment advisers. However, many financial planners seek the credential of “Certified Financial Planner” ( CFP ) . This certification is obtained after a rigorous course of study and difficult testing. There are a number of private organizations conferring the CFP certification but the main body is the Certified Financial Planner Board of Standards Inc. This board requires their CFP's to adhere to the CFP Board Code of Ethics and Professional Responsibility and to the Financial Planning Practice Standards. The board has the right to enforce their Code and Standards through its Disciplinary Rules and Procedures.

Financial planners have no distinct regulation as a group. Their regulation and the responsibility they owe their customers depends upon the type of service they provide. If they provide only financial plans they are not regulated. If they provide investment advice they are regulated as investment advisers. If they trade securities to implement the plans they develop they are regulated as brokers.

While most investment professionals are honest and diligent there are the few bad apples in every professional who do harm to the public. Your client should consider how they would remedy a wrong if they suffer an improper investment loss. Currently, only stockbrokers can be forced into arbitration. If an investment adviser or a financial planner does financial harm to your client they might have to file a case in court. Court cases are very long and costly to resolve. Many times the cost and time involved make pursuing a claim not worthwhile. Arbitration is a faster and less expensive way to resolve investment related complaints. 

Whether your client seeks investment help from a stockbroker, investment adviser, or a financial planner it is important they know who they are working with and what legal obligations they are owed.

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