The Retirement Planning Group

Registered Investment Advisor vs. Broker-Dealer

FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA), which regulates brokerage firms (UBS, Wachovia, Merrill Lynch, Edward Jones, Smith Barney) and their employees, requires only that brokers adhere to the suitability rule. This rule states that a product or service must meet only the standard of being suitable for an investor — it does not have to be in an investor’s best interest.

Example: Your broker identifies two different mutual fund portfolios. Let’s call them Portfolio A & Portfolio B. Let’s assume both portfolios are well diversified and suitable based on your needs. However, Portfolio A has a lower overall cost, but your broker receives lower commissions. Portfolio B pays your broker additional commissions, however your overall expense is much higher. Your broker decides to only present to you Portfolio B as his recommendation.

A brokerage firm can sell a similarly suitable fund that has higher expenses but provides the broker with additional commissions or satisfies sales production quotas (such as selling a proprietary fund instead of a competitor’s fund). And although this isn’t necessarily the best thing for you, as long as the investment is deemed suitable, it’s considered acceptable by FINRA.

Another alternative: Registered Investment Advisory Firms

While Registered Investment Advisor firms (The Retirement Planning Group) must meet the suitability standard, under the Investment Advisers Act of 1940, they also have a fiduciary obligation. Meaning, they must act with the utmost good faith in their clients’ best interests. The fiduciary duty standard is a much higher standard than that of suitability. It is generally considered the highest legal duty that one party can have to another.

DISCLAIMER: Information above applies to clients that have investment accounts at Charles Schwab. Clients with accounts at Purshe Kaplan Sterling Investments are upheld to the standards as set by FINRA.