Many investors are confused about the term investment advice and the different types of professionals who can provide it. Most investors do not understand the differences between investment adviser representatives or brokers calling themselves financial advisers; and the standard of care they think they are receiving from each.
Fee only investment advisers are legally obligated to act in the best interests of their client (i.e. act as a fiduciary). In contrast, brokers who call themselves financial advisers facilitate securities purchases and sales for their clients, usually for a commission, and are primarily governed by FINRA, which (and this is key) requires that investment recommendations they make to their clients be suitable for that particular client. In broker/client relationship, filled with all sorts of conflicts of interests, suitability is an extremely blurry standard at best.
A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are required to act in the best interests of their client (they aren’t), and 70% believe that registered representatives must disclose any conflicts of interest (generally, they don’t)… [TD Ameritrade White Paper].
Due to the influence of special interest, Congress has not taken the initiative to clear up the confusion. Unfortunately for investors, confusing the two can have entirely unintended consequences. A clear line needs to be drawn between them so investors can make more informed decisions. There needs to be a clear distinction between who is a fiduciary and who is a salesperson. Anything less is irresponsible and unacceptable.