The following information is from a recent advertising release from TD Ameritrade.  The information cited is from a survey the firm commissioned to respond to concerns about stockbrokers wanting to offer “fee-only” advice to clients without having to be regulated as an investment advisor.  If you are interested in reading the entire release, you can see the results of the study here http://www.tdainstitutional.com/pdf/InvestorPerceptionStudy.pdf.  We have summarized the key information that is relevant to making an informed decision about using an investment advisor versus a stockbroker.  Aerie Capital Management is an independent, fee-only registered investment advisory.  We currently custody client assets at TD Ameritrade, but we have no affiliation with TD Ameritrade.  Clients are free to choose any brokerage firm they desire.
In the financial world today, there are basically two types of advice available to investors: that given by stockbrokers, and that given by Registered Investment Advisors (RIAs). Unfortunately, most investors don’t know the difference between these two kinds of advice.  In fact, most aren’t even aware a difference exists.
In a recent survey:
o 54% of investors believed both stockbrokers and independent Registered Investment Advisors (RIAs) have a responsibility to act in their best interests
o 74% of investors did not understand the different obligations required of RIAs and stockbrokers. Unlike stockbrokers, RIAs have an obligation to act in an investor’s best interests in all aspects of the financial relationship.
o 79% said they would rather work with an investment advisor if they knew advisors provided greater investor protection than stockbrokers.
The truth is, there’s considerable confusion in the investment community regarding financial advice and the people who dispense it. The following questions and answers aim to sort out some of the confusion, and to help you find advice you can trust.
Some of these key differences follow:
o Investment advisors have a fiduciary duty to act in the best interests of their clients at all times [emphasis added]. Brokerage firms generally are not fiduciaries to their customers and therefore may not make decisions that are solely in their customers’ best interests.
o Investment advisors provide their clients with a Form ADV that describes exactly how the investment advisor does business and obtains the client’s consent to any conflicts of interest that might exist with the investment advisor’s business. Brokerage firms are not required to provide customers with any comparable type of disclosure.
o Investment advisors cannot trade with their clients as principal except in extremely limited circumstances. Brokerage firms often earn significant profits by trading as principal with their customers.
o Investment advisors charge clients a fee negotiated in advance and cannot earn any other profits from their clients without the clients’ prior consent. Most investment advisors are paid an asset-based fee, so their interests are aligned with their clients.  Brokerage firms’ revenues may increase even if the customers’ assets shrink.
o Investment advisors manage money in the best interests of their clients. They do not engage in business activities like investment banking or underwriting, which brokerage firms do. These other businesses may cause a brokerage firm’s interest or attention to focus on other areas of the firm outside of their retail brokerage business and customers.
RIAs are held to a higher standard than stockbrokers when it comes to putting investors’ interests first and doing the right thing for their clients’ investments. Independent RIAs have a fiduciary duty to their clients, which means they must:
o Act in the best interest of their client
o Identify and monitor illiquid securities
o Employ fair market valuation procedures where appropriate
o Observe procedures regarding the allocation of investment opportunities, including new issues and the aggregation of orders
o Disclose all conflicts of interest
o Have policies on use of brokerage commissions for research
o Have policies regarding directed brokerage, including step-out trades and payment for order flow
o Abide by a code of ethics
Stockbrokers are held to suitability obligations on the part of their broker-dealer when making recommendations:
• Reasonable Basis Suitability — the broker-dealer must believe that the recommended security is suitable for any investor
• Customer-Specific Suitability — the broker-dealer must believe that its recommendation is suitable for that particular investor

investement-advisorThe following information is from a recent advertising release from TD Ameritrade.  The information cited is from a survey the firm commissioned to respond to concerns about stockbrokers wanting to offer “fee-only” advice to clients without having to be regulated as an investment advisor.  If you are interested in reading the entire release, you can see the results of the study here http://www.tdainstitutional.com/pdf/InvestorPerceptionStudy.pdf.  We have summarized the key information that is relevant to making an informed decision about using an investment advisor versus a stockbroker.  Aerie Capital Management is an independent, fee-only registered investment advisory.  We currently custody client assets at TD Ameritrade, but we have no affiliation with TD Ameritrade.  Clients are free to choose any brokerage firm they desire.

WHAT YOU NEED TO KNOW ABOUT FINANCIAL ADVICE

In the financial world today, there are basically two types of advice available to investors: that given by stockbrokers, and that given by Registered Investment Advisors (RIAs). Unfortunately, most investors don’t know the difference between these two kinds of advice.  In fact, most aren’t even aware a difference exists.

In a recent survey:

  • 54% of investors believed both stockbrokers and independent Registered Investment Advisors (RIAs) have a responsibility to act in their best interests
  • 74% of investors did not understand the different obligations required of RIAs and stockbrokers. Unlike stockbrokers, RIAs have an obligation to act in an investor’s best interests in all aspects of the financial relationship.
  • 79% said they would rather work with an investment advisor if they knew advisors provided greater investor protection than stockbrokers.

The truth is, there’s considerable confusion in the investment community regarding financial advice and the people who dispense it. The following questions and answers aim to sort out some of the confusion, and to help you find advice you can trust.

HOW ARE INVESTMENT ADVISORS DIFFERENT FROM STOCKBROKERS?

Some of these key differences follow:

  • Investment advisors have a fiduciary duty to act in the best interests of their clients at all times [emphasis added]. Brokerage firms generally are not fiduciaries to their customers and therefore may not make decisions that are solely in their customers’ best interests.
  • Investment advisors provide their clients with a Form ADV that describes exactly how the investment advisor does business and obtains the client’s consent to any conflicts of interest that might exist with the investment advisor’s business. Brokerage firms are not required to provide customers with any comparable type of disclosure.
  • Investment advisors cannot trade with their clients as principal except in extremely limited circumstances. Brokerage firms often earn significant profits by trading as principal with their customers.
  • Investment advisors charge clients a fee negotiated in advance and cannot earn any other profits from their clients without the clients’ prior consent. Most investment advisors are paid an asset-based fee, so their interests are aligned with their clients.  Brokerage firms’ revenues may increase even if the customers’ assets shrink.
  • Investment advisors manage money in the best interests of their clients. They do not engage in business activities like investment banking or underwriting, which brokerage firms do. These other businesses may cause a brokerage firm’s interest or attention to focus on other areas of the firm outside of their retail brokerage business and customers.

WHAT ARE THE ADVANTAGES OF WORKING WITH AN INDEPENDENT REGISTERED INVESTMENT ADVISOR (RIA) OVER A STOCKBROKER?

RIAs are held to a higher standard than stockbrokers when it comes to putting investors’ interests first and doing the right thing for their clients’ investments. Independent RIAs have a fiduciary duty to their clients, which means they must:

  • Act in the best interest of their client
  • Identify and monitor illiquid securities
  • Employ fair market valuation procedures where appropriate
  • Observe procedures regarding the allocation of investment opportunities, including new issues and the aggregation of orders
  • Disclose all conflicts of interest
  • Have policies on use of brokerage commissions for research
  • Have policies regarding directed brokerage, including step-out trades and payment for order flow
  • Abide by a code of ethics

Stockbrokers are held to suitability obligations on the part of their broker-dealer when making recommendations:

  • Reasonable Basis Suitability — the broker-dealer must believe that the recommended security is suitable for any investor
  • Customer-Specific Suitability — the broker-dealer must believe that its recommendation is suitable for that particular investor