Securities Lawyers Blog
Most people do not realize that there is a big distinction between brokers and investment advisors. Many people think, they both recommend securities. While that is true, that is pretty much where the similarities end.
A broker is regulated by The Financial Industry Regulatory Authority (FINRA) a self-regulatory organization (SRO) as provided for under the Securities and Exchange Act of 1934. On the other hand investment advisors are regulated by the Securities and Exchange Commission as provided under the Investment Advisors Act of 1940 (IAA).
A broker is more akin to salesman. A broker’s obligation is to make sure that his or her recommendation is suitable and appropriate for the investor given the investors objectives and other information. However, an investment advisor is more like an appraiser of securities, his or her job is not only to make recommendations that are not only suitable but to continually monitor the investors account to ensure that the investor has a viable financial plan over time. Consequently, a broker is compensated on a transactional basis while an investment advisor is paid a percentage of the assets managed by the advisor.
After the financial crisis, the Dodd-Frank financial reform law mandated that the SEC review two of the most important distinctions between brokers and investment advisors. One area of review was to examine the implementation of a fiduciary standard in the brokerage industry. The other, was whether FINRA should be given regulatory jurisdiction over investment advisors.
An investment adviser is an individual or company who is paid for providing advice about securities to their clients. Although the terms sound similar, investment advisers are not the same as financial advisers and should not be confused. The term financial adviser is a generic term that usually refers to a broker (or, to use the technical term, a registered representative).
Recently, FINRA dropped its bid to regulate investment advisors. Last year, FINRA advocated for legislation that would shift adviser oversight for advisors and the measure never made it out of the House Financial Services Committee.
FINRA chief executive Richard G. Ketchum was quoted in an interview with InvestmentNews.com saying, “We’re realistic enough to know that there doesn’t appear to be any strong momentum to move forward in Congress, given other priorities.” Mr. Ketchum said that FINRA is not giving up arguing that an SRO would strengthen investor protection and can conduct more adviser examinations than the SEC can perform.
A 2011 SEC study indicated that the SEC only conduct annual examinations of 8% of the approximately 12,000 advisers. By contrast, FINRA examines the 4,275 broker-dealers about once every two years.
Investment advisers and lobbyists fiercely opposed the FINRA SRO law last year by arguing that it would add a costly new layer of regulation. Even though FINRA has dropped the proposal for now investment advisor advocates say they will remain vigilant.