Money Matters: Financial Advisor/Financial Representative: Aren't they the same?

You might find it hard to believe, but behind the scenes for several years a storm has been brewing in the Financial Services industry. The Financial Planning Association (FPA) was suing the Securities Exchange Commission (SEC) over proposed regulations. The appellate court victory by the FPA I believe was surprising to many.

While you may not have seen any local coverage of this lawsuit or the results, following the announcement stories broke in the Wall Street Journal, Nightly Business Report, Washington Post, Bloomberg, New York Times, and many others. You might be asking, why all the whoopla? Without going into the finer points of law that were being argued, one of the key issues was whether a Financial Representative could perform the same duties as a Financial Advisor without the "fiduciary" responsibilities. Many of the laws governing this industry go back decades and in this case to the Investment Advisor’s Act of 1940.

To help set the stage, let’s first discuss who are Advisors and Representatives. An Advisor is a person or firm registered under the 1940 Act and can be state or federally registered. Per this act, they are permitted to provide advice or management to clients and to collect a "fee" for these services. A Representative is an individual who has passed security exams presented by the National Association of Security Dealers (NASD). The individual is referred to as a Registered Representative and is licensed to sell selected securities based upon their licenses and to collect a "commission" for their services. Registered Representatives are often called stockbrokers, but this is just another name used by the public and industry alike.

You most likely noticed the first difference, and that is how the two professionals are compensated. Advisors can collect a fee, while representatives must be paid by commission. One individual can be dually licensed and hold both credentials. As an example, I am state licensed in Tennessee and Texas as an Investment Advisor. But, I also hold Series 63, 22, 7, and 24 which are NASD licenses for the sale of securities. One is not necessarily better than the other; however, they do provide different services and have a very different requirement when it comes to product recommendations.

Those investment professionals who are registered as an Investment Advisor or an Advisor Associate under this act have as part of their responsibility the requirement to act as a fiduciary on behalf of their clients. This means they are required to recommend what is in the "best interest" of their clients. Representatives have the requirement to provide what is "suitable" for their clients. While a product may meet the requirement of being "suitable," it could fail to be in the best interest of the client.

The SEC had proposed a rule that would permit many Representatives the ability to offer advice and management without the fiduciary requirement which was part of the original Act of 1940. It is this failure to require the fiduciary responsibility as mandated by the act that was one of the points of the FPA lawsuit. It was their belief by not requiring all Advisors to adhere to the same rules could be confusing to clients. Many surveys have been taken of clients using investment professionals; and without fail, it is clear the public’s opinion is not always accurate when asked about rules, services, and advisor responsibility.

How will this impact the public? It may still be too early to tell the total impact, but those investors using Representatives to provide investment management may be asked to shift their account or take on a new manager. The industry will clearly respond to the ruling, and many more Representatives may also become Advisors or Advisor Associates and thus dually licensed. One thing is for certain, there will be less blurring between the lines of Representatives and Advisors.

Who is the best for you? There is no clear-cut answer. It may depend upon how you like your financial professional to be compensated, commission or fee? It may also be based upon the products offered; as there are products many Advisors cannot provide, but there are others you can only obtain from an Advisor. For my firm, Quality Financial Concepts, the ability to offer both types of services and not have any product restrictions was the factor I used to become dually licensed back in the 1990s. This is another option for you the investor to obtain the type of services best suited for your investment
style, account size, risk, and products.


Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville TN 37801. Be sure to mark your envelope Money Matters.

Doug Horn, CFP, is an area financial planner with more than 21 years financial experience and founder of Quality Financial
Concepts, located in downtown Maryville on Broadway.

Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member NASD, IPC.

© 2007 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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