Is Your broker working for your interests?

The Department of Labor announced new rules that will require financial advisors and brokers to act in the best interests of their clients when handling individual retirement and 401(k) investment accounts. Seems like common sense? It is, but unfortunately the advice provided by brokers isn’t always in their client’s best interest but rather the amount of commissions the broker will make. The ‘conflict of interest’ rules aren’t expected to go into effect until Spring of 2017, if they survive the next year of challenges in court.  Full implementation and adoption won’t occur until January of 2018.


Money is the name of the game.  According to the Obama Administration, “extensive academic research” showed that conflicts of interest were estimated approximately $17 billion a year in embedded fees and investments that were recommended to clients but weren’t in their best interests.  The new rules are aimed specifically at tax-advantaged individual retirement accounts and 401(k), mutual funds and variable annuities.


Broker vs. Financial Advisor


Brokers perform the actual buying and selling of investment products such as stocks, securities, and providing financial advice. They recommend investments and make the purchases on behalf of their clients based on ‘suitable’ investments based on their client’s proximity to retirement, financial situation and risk tolerance.  Brokers have a great deal of power in their position to make recommendations and steer clients toward annuities or other investments that pay higher commissions than other products. This is where the conflict of interest comes into play.  Rather than being a true ‘fiduciary’ for clients, offering only guidance and investment options that are truly in the client’s best interests, they are not obligated to put their client’s interests above their own financial motivations. The semantic difference is that the recommendations they make must be ‘suitable’ but not necessarily products that are the most appropriate for you. Under the new rules, brokers will now be required to act solely in their client’s best interests even if it will cost them potential commissions down the line. Brokers must also act as fiduciaries if they are managing an investment account or given full control over an investor’s account.


A Financial Advisor, or ‘fiduciary’ has the legal and moral obligation to put the client’s interests above all else.  This principal translates into an honest disclosure of fees and commissions that highlights any potential conflicts between investments and investment strategy.  The new rules do not apply to most other forms of investing, but they are expected to “promote a shift away from commissions for individual transactions” while driving toward flat upfront fees that are easier to understand and manage. For groups like the Certified Financial Planners (CFP) this concept has been the cornerstone of their communication campaign and practice for years. For advisors that provide financial advice to small businesses that sponsor 401(k) plans and their participants, they can qualify for exemptions to some of the most severe rules.

Investment brokers and financial advisors share the same type of educational backgrounds including a Bachelor’s degree in finance, business, economics or similar fields.


Brokers then complete the following steps:


  •  Take the Series 7 examination on buying and selling investments.
  • Register with the Financial Industry Regulatory Authority (FIRA) for additional licensing examinations and training.
  • Take the series 63 Uniform Securities Agents State Law examination.


Financial advisors (FA) have the option to further their field of study by becoming a Certified Financial Analyst (CFA) and/or the Certified Financial Planner which requires extensive coursework, proof of a bachelor’s degree and work in financial planning for a minimum of three years. Financial Advisors are required to register with the Securities and Exchange Commission and/or state securities regulators.


You work hard for your money and want to ensure that anyone who has financial interest in your assets is held to a high standard.  Protect yourself and your financial future by taking the time to learn the differences between the financial and investment advisor types so that you know what you can and should expect from their advice and guidance.


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Copyright 2016 by Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, a PASBA member accountant, located in Londonderry, New Hampshire.


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