It seems like common sense that investors would want to work with professionals who have their best interests at heart. However, many people may be misguided when it comes to which investment professionals are required to look out for their clients.
Jason Zweig of the Wall Street Journal recently discussed the differences between brokers and investment advisors. In short, brokers are only required to recommend investment products that are "suitable" for clients. Advisors are legally required to act in their clients' best interests at all times, which is also called their fiduciary duty.
"If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years," Zweig wrote.
Zweig goes on to cite a report by Rand Corp. showing that many investors don't understand these important differences. In a survey conducted by Rand, 58 percent of respondents believed brokers are required by law to disclose any conflicts of interest, compared with 62 percent believing the same of investment advisors. Also, 42 percent believed brokers are required by law to act in the best interest of clients, while 49 percent thought the same of investment advisors.
Related focus sessions showed even stronger results, with 70 percent of participants believing that brokers are required to disclose conflicts of interest and 63 percent believing brokers are required to act in clients' best interests.
When choosing to work with someone regarding your financial well being, why would you work with someone who is not required to act in your best interests at all times? You'd do well to consider this when choosing someone to help you with your financial goals.