Understanding who’s who among investment professionals

Sarah Menge
Sarah Menge

When it comes to investing, there are many schools of thought about the most profitable approaches. Depending on your level of financial expertise, you might want to take a more independent approach. Alternatively, you might prefer the assurance of having a professional manage your portfolio. No matter what type of investor you are, it’s important to understand the different types of investment professionals and the concepts of fiduciary standards and duties.

The fiduciary standard refers to the fundamental obligation for professionals to act in the best interests of their clients. It’s also referred to as the “best interest” rule because the concept is to always act in the best interests of clients. However, not all investment professionals have been subject to the best interest rule in dealing with their clients. In June, the Labor Department issued new fiduciary standards for stockbrokers that just now subject them to the best interest rules when offering investment advice to clients. There are other, unregulated investment professionals that still aren’t subject to the standard. It’s important to understand the experience, background and regulations for someone with whom you’re considering working.   

Another concept related to the fiduciary standard is fiduciary duty. This is common for employers who offer benefit plans. Most employers will select a third-party administrator, bank or insurance company to handle the actual investments. Some administrators will even share in the fiduciary duties. But as the sponsor of the plan, the employer has the ultimate fiduciary duty for overseeing the plan and making sure employees are offered diversified investment options, fair fee structures and oversight of the investment manager.

Before selecting a personal investment professional or administrator for your benefit plan, understand what professional designations are out there and what fiduciary standards or duties apply.

The financial services industry uses several job titles or descriptions, including financial advisor, financial analyst, financial planner and investment consultant. These titles can be used by any professional, even if they don’t have specific levels of expertise or education. Some professionals must pass examinations and register with such oversight agencies as the Securities and Exchange Commission  or Financial Industry Regulatory Authority. Other professionals could be unregistered and working off personal experience and not subject to regulatory boards. Meeting with potential advisors and identifying professional designations will also help you understand how the professional is typically paid and whether or not they are subject to fiduciary standard or best interest rules.

Some of the more common registered professionals include stockbrokers or broker-dealers, registered investment advisors (RIAs) and certified financial planners (CFPs). Stockbrokers are typically used by a more independent investor, are commonly paid on a per-trade basis and are required to make investment suggestions based on their clients’ incomes and risk tolerances. Registered investment advisors typically serve as a portfolio manager and could be paid on a fixed fee or percentage fee based on the value of the assets they manage. These professionals have been subject to fiduciary standards since 1940. Certified financial planners could specialize in one area — such as estate planning or retirement — or might provide more comprehensive planning. Fee structures typically be similar to those for RIAs. The CFP board maintains standards of professional conduct that include requirements to put clients’ interests ahead of  CFPs.

In setting up benefit plans, you also could face several options for professionals with which to work, including broker-dealers, investment advisors, record keepers, trustees and some “full-service” administrators that provide all those services. Similar to selecting a personal investment advisor, it’s important to understand the role of each professional, how fees are structured and what fiduciary duties they assume for a plan.

Regulators are implementing more fiduciary standard rules to protect individual investors, and agencies consistently monitor benefit plans to protect retirement funds. But one of the most important protections you can give yourself is proper research and due diligence before hiring an investment professional. Such agencies as the SEC and Financial Industry Regulatory Authority offer tools to help you select an advisor. Make sure you clarify what professional designations or affiliations are held and consider contacting an oversight organization to make sure they’re in good standing.