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Submitted by: Wm. C. Prewitt
William Chandler Prewitt, M.S., CFP®, has been advising clients with sound advice since 1983. Bill has been chosen by Medical Economics Magazine annually since 1998 as one of the 120 Best Financial Advisers for Doctors. Charleston Financial Advisors is located in historic district of Charleston, South Carolina.
One of the debates raging in the investment industry today is the concept of fiduciary duty to a client. Most investors believe that the people they work with will act in their best interests at all times. Nothing could be further from the truth.
The industry is organized among those who provide brokerage services (example: Merrill Lynch) and those who provide investment advisory services (example: Charleston Financial Advisors, LLC). One would expect the same standard to apply to both but that is not the case. Investment advisors are held to a higher standard -- the fiduciary standard of putting investor’s interests first.
In the past, brokerage firms could offer investment advice if it was “solely incidental” to their business and they did not get compensation for investment advice. In 1999 the SEC allowed brokerages to charge fees without registering as investment advisors. This muddied the waters. Last year, in an attempt to clarify, brokerages were required to disclose that their interests might not always be the same as their clients’. As of this year, brokerages may only offer discretionary account and financial planning services if the accounts are regulated as investment advisory accounts. The problem is that some brokerages operate in a foggy area in-between: they hint to an investor that a fiduciary relationship exists when, in fact, it does not.
So what are some differences to be aware of? Investment Advisors (IAs) have a duty to act in a fiduciary capacity all the time; Broker Firms (BFs) are not fiduciaries. IAs disclose how they do business and potential conflicts of interest; BFs do not make comparable disclosures. IAs rarely can trade with their clients as principal; BFs earn significant undisclosed profits by trading as principal with their customers. IAs manage money in the best interests of their clients and avoid directing client business to collateral activities where they could profit; BFs engage in activities like investment banking and underwriting, steering the firm’s attention away from the interests of the client.
It all boils down to knowing where to go to get advice you can trust.
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