A financial advisor is a professional who suggests and renders financial services to clients based on their financial situation. In many countries Financial Advisors have to complete specific training and hold a license to provide advices. In the United States for example a financial advisor carries 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 adviser to be: brokers, investment advisers, accountants, lawyers, insurance agents and financial plannersFinancial 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 savingThe 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 the adviser 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 new 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.