Financial Advisers

financial advisersFinancial advisers are finance professionals who suggest and render financial services to clients based on their financial situation. In many countries financial advisers have to complete specific training and hold a license to provide advice.

In the United States for example a financial advisers carry a Series 65 or 66 license and according to the U.S. Financial Industry Regulatory Authority (FINRA), license designations and compliance issues must be reported for public view. FINRA describes the main groups of investment professionals who may use the term financial advisers to be: brokers, investment advisers, accountants, lawyers, insurance agents and financial planners.

Financial advisers typically provide clients/customers with financial products and services, depending on the licenses they hold and the training they have had. For example, an insurance agent may be qualified to sell both life insurance and variable annuities. A broker may also be a financial planner. A financial adviser may create financial plans for clients or sell financial products, or a combination of both. They also provide some insight on savings.


In the United States, the Financial Industry Regulatory Authority (FINRA) regulates and oversees the activities of brokerage firms, and their registered representatives. The Securities and Exchange Commission (SEC) regulates investment advisers and their investment adviser representatives. Insurance companies, insurance agencies and insurance producers are regulated by state authorities. Investment Advisers may be registered with state regulatory agencies, the Securities and Exchange Commission, or pursuant to certain exemptions, remain unregistered.

Fiduciary Standard

The anti-fraud provisions of the Investment Advisers Act of 1940 and most state laws impose a duty on Investment Advisors to act as fiduciaries in dealings with their clients. This means financial advisers must hold the client’s interest above its own in all matters. The Securities and Exchange Commission (SEC) has said that an adviser has a duty to:

– Make reasonable investment recommendations independent of outside influences.
– Select broker-dealers based on their ability to provide the best execution of trades for accounts where the adviser has authority to select the broker-dealer.
– Make recommendations based on a reasonable inquiry into a client’s investment objectives, financial situation, and other factors.
– Always place client interests ahead of its own.

Since the financial crisis in 2008, there has been great debate regarding the fiduciary standard and to which advisers it should apply. In July 2010, The Dodd–Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures, including enhanced disclosures and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisers regulated by the 1940 Act. As of July 2016, the SEC has yet to extend the fiduciary duty to all brokers and advisers regardless of their designation. However, in April 2016, the Department of Labor finalized a thousand-page rule holding all brokers, including independent brokers, working with retirement accounts (IRAs, 401ks, etc.) to the fiduciary standard.

In June 2016, as a way to address adviser conflicts of interest, the Department of Labor (DOL) ruled in a redefinition of what constitutes financial advice, and who is considered a fiduciary. Prior to 2016, fiduciary standards only applied to Registered Investment Advisers (RIAs), and did not impact brokers, who previously operated under a less strict suitability standard that provided leeway to provide education without advice. The new ruling requires all financial advisers who offer advice for compensation to act as fiduciaries and meet the fiduciary standard, but only when dealing with retirement accounts such as IRAs or 401(k)s. The ruling includes one exemption for brokers, Best Interest Contract Exemption (BICE), which can be allowed if the broker enters into a contract with the plan participant and meets certain behavioral requirements. The ruling does not impact the advice or investment product sales pertaining to non-retirement accounts.

Opposition to the fiduciary standard maintains that the higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers. Other criticisms suggest that consumers with smaller retirement accounts may be less able to access personalized advice due to advisor/broker compensation models, many of which have been restructured to comply with the fiduciary rule.

The decision has caused a massive shift in the financial community with 73% of advisors concerned the rule will have an adverse impact on how they do business, 71% anticipating increased client frustration and 66% planning to reevaluate the products they recommend. Enforcement of the rule began on June 9, 2017.

Fiduciary Rule Update

The United States Court of Appeals for the Fifth Circuit voted on March 15, 2018 to overturn the Department of Labor’s (DOL) new fiduciary rule, requiring financial professionals who handle individual retirement and 401(k) accounts to act in the best interests of their clients. The federal court’s 2 -1 decision vacates the rule nationwide (see The DOL Fiduciary Rule Explained).

The regulation, introduced during President Obama’s administration, is intended to prevent insurance agents and broker dealers from selling their clients expensive financial products for retirement that don’t serve their best interests. Instead, those handling retirement products were to be held to the fiduciary standard.

Fiduciary vs. Suitability

Financial professionals held to the fiduciary standard are required to educate their clients, to be transparent about how they are being compensated, and to provide full and clear disclosure of the cost of their services.

Previously, many financial professionals were only held to a suitability standard, which required that products they sell be designated as suitable for their client’s needs. This made it legal to recommend more expensive products that pay substantial commissions to the sellers, rather than comparable, cheaper products with lower or no fees.

Proponents of the regulation argue that the financial industry should be held to the higher standard, while opponents say that the DOL overstepped its authority. Opponents also claim that the cost of implementing such a complex rule, and the challenges of compliance for small firms, could result in higher fees for investment advice. This could make retirement planning less accessible for individuals without a lot of assets.


Although the fiduciary rule is currently endangered, many suspect that the legal battle is not over and remain optimistic that the DOL will request a rehearing. Until then, the discussions that are happening as a result of the regulation have a silver lining: More people are starting conversations with their advisor about how they are compensated, and whether they act as a fiduciary. These conversations will help investors get the information they need to make the most cost-effective decisions.



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