Investment Advisor

What is an “Investment Advisor”

Many people are justifiably confused about the difference between a stockbroker, an investment advisor, a financial planner and a financial advisor. An “Investment Advisor”, in quotes because it designates a particular license, differs from a stockbroker in several respects. First, an “investment advisor” has a different license than a stockbroker and second, investment advisors are not required, as stockbrokers are, to be employed by a licensed broker-dealer. Stockbrokers are commonly called “financial advisors” and all work at brokerage firms. You cannot be a stockbroker and hang out your shingle on your own. An “investment advisor”, however, can open his own shop and work entirely on his own. “Investment Advisors” must be licensed through the Securities and Exchange Commission (SEC) if they have a certain amount of assets under management or, if not, they are regulated by the state in which they do business which has its own “investment advisor” rules and regulations.

The advice given by either a Registered Investment Advisor (RIA) or a stockbroker is the same, in many respects. They each give investment recommendations across the entire spectrum of available investments. There are several distinguishing factors for Registered Investment Advisors, though. First, the Investment Advisors Act of 1940 categorizes all Registered Investment Advisors, whether they are state or SEC licensed, as fiduciaries. Stockbrokers, on the other hand, are not necessarily fiduciaries, but they may be depending on the facts of the case. This is an important distinction, because what it means is that fiduciaries must act in the best interests of their clients. If it is established that there is no fiduciary relationship in a stockbroker-customer relationship, arguably the stockbroker’s responsibility to the client is less: the stockbroker must only ensure that he is making suitable recommendations to the client. It is for this reason that there is a big push to try to make all stockbrokers fiduciaries.Another big difference between Registered Investment Advisors and stockbrokers is that whereas all claims against stockbrokers must be arbitrated at FINRA, most RIAs do not require arbitration in their agreements. When there is no arbitration provision, that means the investor must sue in court. While court has distinct advantages over arbitration, namely that your case will be decided by a jury of your peers as opposed to three arbitrators with conflicts of interest, the biggest downside is the cost and the time. Court cases can be extremely expensive due to deposition costs and expert witness reports, and court cases can go on for years and years. These two downsides are magnified for investor claims, because the investor only has a claim, in part, because she has lost a significant amount of money. Investors often cannot afford to spend significant sums to recover their losses. Even Registered Investment Advisors who do have arbitration provisions, they typically require arbitration at the American Arbitration Association (AAA) or JAMS Inc. Even these forms can cost tens of thousands of dollars. FINRA arbitrations, on the other hand, can be much less expensive.

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