Fiduciaries have a legal obligation to act in the best interests of their clients. Under the Investment Advisers Act of 1940, registered investment advisors (RIAs) owe fiduciary duties to all of their investment clients.
However, not all financial advisors are fiduciaries. Many financial advisors are simply brokers. Under current law (2018), brokers are not obligated to act in the best interests of clients. Instead, stockbrokers are only held to the suitability rule. A broker can only sell investment products that are suitable for the customer’s goals and financial position, but a broker is not necessarily required to sell products that are in a customer’s best interests.
For this reason, it is imperative that investors know whether or not their financial advisor is a fiduciary. Here, our experienced investment fraud attorneys highlight three important questions that you should ask your current or prospective financial advisor so that you can better understand their obligations to you.
Three Questions to Ask Your Financial Advisor
What Legal Standard Do You Operate Under?
On this issue, there is no reason to beat around the bush: If you do not know whether or not your financial advisor is a fiduciary, you need to ask. You should ask a direct question, and you deserve a direct answer. You need to get a clear answer on what legal standard controls your relationship with your financial advisor. With few exceptions, it will either be the fiduciary duty rule or the suitability rule.
Beyond simply asking the question, this is something that you need to get in writing. If your financial advisor tells you that they will be acting in your best interests, be sure that you get clarity and confirmation. Ask them to show you the specific passage in your customer agreement that confirms that they are a fiduciary.
Do You Receive Compensation for Selling Certain Financial Products?
In practice, one of the biggest differences between fiduciaries and brokers is that fiduciaries do not get additional income from other sources when they sell or recommend investments. If your financial advisor gets commissions for selling certain mutual funds, annuities, or other financial products, then they are almost certainly acting as a broker.
Are You Dual-Registered? If So, Does that Impact Our Relationship?
Finally, all investors should know that many financial advisors are dual-registered. In the modern investing world, dual registration has become a very common practice. This means that the same financial representative acts as a fiduciary with some customers and also acts as a broker with other customers. This can make things confusing for investors. If your financial advisor is dual-registered, you should be sure to clarify which they will be acting in when it comes to your relationship.
Contact Our Financial Advisor Fraud Lawyers Today
At Sonn Law Group, our investment fraud attorneys hold bad-acting financial advisors legally liable for their misconduct. We handle all claims using contingency fee agreements — our attorneys only collect our legal fees if we help you recover compensation for your losses.