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Investor Confusion from Misleading Brokerage Industry Advertising – When is Your Advisor a Fiduciary?

Samuels Yoelin Kantor LLP

On March 25, the Public Investors Arbitration Bar Association (PIABA) released its study of confusing advertising messages by major broker-dealer firms like Allstate, UBS, Morgan Stanley, Berthel Fisher, Ameriprise Financial, Merrill Lynch, Fidelity Investments, Wells Fargo, and Charles Schwab. While these firms advertise that they put their clients’ interest first, excerpts from FINRA arbitration filings by these same firms show that when there’s a customer dispute the firms disavow any fiduciary obligation to the client.

Why should you care? Customers expect that financial advisors act in their client’s best interest when making investment recommendations. But that’s not always true. The “fiduciary” standard is the highest level of legal duty, with important ramifications as to the responsibilities of the advisor and types of claims that can be made in court or FINRA arbitration. But, the current reality is there is no uniform fiduciary standard among financial advisors. FINRA-registered brokers and brokerage firms selling investment products have no such duty imposed by federal law. Brokers can essentially put their own interest first – such as the incentive of high commissions for selling products like non-traded REITs, high-fee proprietary mutual funds, or variable annuities – so long as they meet a much lower FINRA standard of reasonably suitable recommendations. In contrast, SEC-licensed Registered Investment Advisors and RIA firms, which provide investment advice but can’t sell products the way a broker can, do have fiduciary duties under the federal Investment Advisers Act of 1940. State law differs, with some states holding brokers to the higher fiduciary standard based on the circumstances.

What happens when your financial advisor is both a FINRA-registered broker and SEC-licensed RIA? Well, that’s where it gets even trickier.   Depending on the type of investment account, the firm may hide behind the advisor wearing only a “broker” hat (for example, in a non-discretionary brokerage account) despite charging wrap fees or other “managed” fee arrangements.

US News & World Report picked up the PIABA study and Daniel Solin wrote about it, saying “It’s funny that there’s even a “debate” over whether brokers should be required to act in the best interest of their clients. It’s even more nonsensical that many investment advisors to retirement plans don’t have this obligation.”

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