As an investor, you have probably heard financial professionals referred to by many different terms, including investment advisor, financial advisor, broker, stockbroker, etc. In the modern world, these terms are often used in loose ways. Indeed, in some cases, they are often used to refer to the same type of financial professional.
However, it is important for all investors to understand that there are actually real legal differences between different types of investment representatives. To protect your financial interests, it is imperative that you have a basic understanding of the legal duties your investment professional owes to you.
At Sonn Law Group, our securities fraud attorneys are aggressive advocates for investors nationwide. We want to give you the information you need to protect your money. Here, we have put together a basic guide for understanding the duties that brokers owe to investors.
Investment Advisors Have Fiduciary Duties
Under the Investment Advisers Act of 1940, investment advisors owe a fiduciary duty to their customers. This type of legal obligation is a very high standard of care. It requires investment advisors to always put their clients’ best interests first, even above their own interests. In practice, a fiduciary duty requires investment advisors to do many different things, including:
- Putting their clients’ needs first;
- Acting with adequate professional skill;
- Making full disclosures of any material information; and
- Avoiding any undisclosed conflicts of interest.
If an investment advisor breaches their fiduciary duty, and it results in their client losing money, then that client has the legal right to hold the advisor legally responsible for the investment losses.
Stockbrokers are Subject to the Suitability Rule
Unlike investment advisors, stockbrokers are not considered to be fiduciaries for the purposes of the Investment Advisers Act of 1940. Instead, stockbrokers are subject to regulation under Securities Exchange Act of 1934 and the rules of their self-regulatory organization. Currently, that self-regulatory organization is the Financial Industry Regulatory Authority (FINRA).
FINRA has many important rules, though for this purpose, the most important is the suitability requirement (Rule 2111). Under the suitability rule, stockbrokers must ensure that any financial products that they are selling to investors are truly appropriate for their individual needs. To be clear, this is a lower legal standard than is being a fiduciary. It allows a stockbroker to legally:
- Sell clients the financial products that pay the highest commissions;
- Offer clients proprietary products offered by their firm; and
- Make investment recommendations while not disclosing conflicts of interests.
Under the suitability rule, a stockbroker is not necessarily required to always act in the best interests of the client. Many investors find this fact to be shocking, but it is true. Your stockbroker is only required to ensure that any investment recommendations or sales are suitability for your situation. The investment does not have to be in your best interests.
Know the Difference: Who is a Fiduciary?
Is your current or prospective financial representative a registered investment advisor who owes you a fiduciary duty, or a stockbroker who is subject to the suitability rule? If you are not sure, you are certainly not alone. This is a complicated issue that confuses many investors.
To make matters even more confusing, many professionals act as both. According to a 2011 study conducted by the Securities and Exchange Commission (SEC), approximately 88 percent of all investment advisors were also registered as brokers.
This means that the same professionals are often subject to different legal standards when dealing with different clients. An investor could also have multiple different accounts with one financial professional. Sorting out duties in this type of scenario can be deeply complicated.
It is important to understand the basic difference between an investment advisor a stockbroker. For the purposes of the Investment Advisers Act of 1940, and investment advisor is a professional engaged in the business of advising other. These financial professionals typically provide ongoing advice and portfolio management to clients based on their stated goals and investment objectives.
On the other hand, a stockbroker is a representative who handles a specific transaction. With a stockbroker, each investment purchase is considered a unique transaction. That purchase must be suitable for the customer’s investment objectives, but, under the law, it does not necessarily have to be in their best interests.
Major Gaps Remain in the Investor Protection
In recent years, regulators have considered expanding the fiduciary duty requirements to stockbrokers in order to ensure that recommendations are not tainted by undisclosed conflicts of interests. Unfortunately, brokers and brokerage firms have fought aggressively against this type of expanded investor protection.
While regulators were moving in the right direction, soon after assuming office, President Trump signed a memorandum that kept the status quo in place. His action halted the proposed implementation of a rule that would have offered additional protection to investors.
Do Not Hesitate to Ask Questions to Your Broker
If you are working with a financial professional, whether you are getting ongoing investment advice, or simply getting advice in regards to a specific transaction, you should not hesitate to ask questions. The more questions you ask, the better off you will be.
To start, you should inquire about what type of duty the investment advisor or stockbroker owes to you. You can always ask about potential conflicts of interests. No matter what type of professional you are working with, it is unlawful for them to make material misrepresentations.
If you find that a broker is annoyed by your questions, or seems to be acting a deceptive manner, you should be ready to walk away. You can find another, more reliable financial professional who can truly protect your best interests.
Contact Our Stockbroker Negligence Lawyers Today
At Sonn Law Group, our investment fraud attorneys have helped many investors recover full compensation for their losses. If you believe that your stockbroker violated his or her duties, you should contact our legal team today. We offer free, fully confidential case evaluations to investors in South Florida and nationwide.