What are the Two Ethical Standards for Financial Advisors?

Based on Investor Watchdog research, people are very dependent on the ethics of financial planners, financial advisors, and money managers. They “hope” these professionals provide ethical advice that helps them achieve their financial goals. This “hope” has a major adversary. Wall Street firms want to minimize the ethical standards that apply to the legions of sales representatives (reps) that sell their products.

Investors have a tough time measuring advisors’ competence and trustworthiness because they do not have track records or mandatory disclosure requirements. Wall Street likes it this way. In fact, financial service firms spend millions of dollars per year on lobbyists who minimize industry standards for the ethical treatment of investors.

The consequence of Wall Street actions is the financial service industry has two major ethical standards. There is a lower standard for representatives who sell investment products for commissions. There is a higher standard for financial advisors who provide advice for fees.

Suitability

Stockbrokers and other types of sales reps who hold securities licenses are supposed to make “suitable” recommendations. This is a deliberately vague standard that varies by investor. For example, an aggressive equity investment that is suitable for a younger investor may not be suitable for an older investor.

Suitability is tied to the “Know Your Client” rule that also impacts the recommendations of sales reps. Reps are supposed to know their clients well enough to make suitable recommendations.

Financial service firms prefer a low ethical standard for reps because it minimizes their liability for doing what is best for their clients. As added protection, they document suitability with one-sided sales agreements that protect companies and transfer as much responsibility to investors as possible.

The reps and their firms are off the hook. Consequently, this ethical standard provides little or no protection to investors. Wall Street wins again.

Investor Interests Come First

Financial professionals who are Registered Investment Advisors (RIA) or Investment Advisor Representatives (IAR) are held to a much higher, broader, clearer standard. RIA and IAR advice and services must put always put investors ahead of their own.

RIA and IAR registrations permit professionals to provide advice and ongoing financial services for fees. RIAs and IARs are also financial fiduciaries, which is the source of their higher ethical responsibilities. Fiduciaries hold positions of trust therefore they must be trustworthy. Advisors are trustworthy when they are required to put investor interests first.

The Bottom-Line

The financial service industry wants lower ethical standards for people who sell and higher standards for people who advise. Unfortunately, investors do not know the critical differences between sales recommendation and advice. There aren’t any.

If I was a typical investor this tells me I should not buy investment products from reps who make a living selling investment products. I should only buy from RIAs and IARs who are held to higher standards.

Every year thousands of investors sue advisors and firms for unsuitable investments. Most of them lose because they signed documents that said the investments were suitable. They did not know the implications of the document when they signed it. Ignorance will not win in arbitrations.

It is up to investors to develop their own processes for gathering, reviewing and storing data that documents their requirements, risk tolerances, and performance expectations. Advisors should be required to sign-off on their requirements.

Investor Watchdog provides free tools, services, and documentation that protect investor interests. Now you have a level playing field.