The fiduciary standard required of an RIA is the “better and best” way to make sure a client’s needs come first.
There are good jobs and then there are great jobs. I even suppose there are bad jobs, which I could but would rather not discuss! I used to have a good job. I liked my job. My career as an investment representative started with a large broker/dealer. My employer offered endless resources and an established reputation. It was an impressive organization where I gained an understanding of financial markets and learned how to develop meaningful client relationships.
But, after 11 years I found myself questioning whether or not I loved going to work each day. While I was proud of the professional services I offered to my clients I recognized there were limitations presented by my employer. I felt my clients could be better served with a more objective and unbiased perspective.
Making the Move
Having establishing Profolio Investments, a Registered Investment Advisor firm a little over a year ago, I’ve discovered what I’d hoped for. That my clients are better served from the autonomy and independence of an RIA. Every decision that I make is now based on the single question, “What is best for the client?” Starting an RIA has come with its share of challenges but it has given me an incredible sense of fulfillment that was missing before. Without a doubt I love my job as an RIA.
Broker/Dealer vs. Registered Investment Advisor
What many don’t know is that a very different set of regulatory standards apply to investment representatives depending on whom they work for. In one category are Registered Representatives who are employed by broker/dealers. Broker/dealers are the large household names that come to mind when you think of investment firms. They fall under a set of standards known as suitability. In the other category are Investment Advisor Representatives who work for Registered Investment Advisor firms. RIA firms come in all shapes and sizes, ranging from one man shops working with a handful of clients to those with many advisors managing billions in client assets. The important distinction is that an RIA falls under the fiduciary standard.
The suitability standard is regulated by FINRA, the Financial Industry Regulatory Authority. It requires broker/dealer firms to gather pertinent information about their clients which enables them to recommend investments that are suitable to an investor’s specific circumstance. It factors in such things as age, risk tolerance, investment experience, and tax status. All very good points to consider before recommending an investment.
But, if suitability is a “good” way to ensure client’s needs are met then the fiduciary standard required of an RIA is the “better and best” way to make sure a client’s needs come first. The fiduciary standard was born out of the Investment Advisors Act of 1940 and is administered by either the SEC or an individual state’s securities regulator. In short, an advisor acting in a fiduciary capacity must put a client’s interest before anything else, most importantly, before the advisor’s own interests.
What does it all mean?
You can think of it this way; a broker/dealer can satisfy suitability if it recommends to its clients the least suitable investment from a list of suitable investments. For this reason broker/dealers will typically recommend investments managed by their own firm even though a better alternative may be available elsewhere. An RIA on the other hand, is required to consider additional factors such as fees and commissions and recommend the best overall investment option to their client.
As an investment advisor, I now enjoy more independence and objectivity than I did before. The strategies my clients and I create together don’t have limitations. I am able to bring together the best solutions possible. Instead of just focusing on meeting my client’s needs, I can focus on putting their needs first. My compensation is no longer tied to mutual fund fees and pricey investments. It is tied to the effort that goes into getting to know my clients, going the extra mile, and putting their needs before my own. It’s this new focus that’s helped me move from a job that I like to a job that I love.