Brokerage vs. Registered Investment Advisor Account - Show 141

Friday, December 12, 2014 7,192 views

Let’s say a car salesman has two cars: a coupe and a sedan. Now let’s say he gets paid a bonus for every sedan he sells…but just a regular commission for the coupe. Which car is he going to push harder? Can you be certain the sedan is the best car for you based on the salesman’s recommendation? This is a very simple representation of a conflict of interest.

Now, when it comes to your money, does your broker have a conflict of interest? While you may think he couldn’t possibly be allowed to sell you a fund that isn’t in your best interest, be sure you are reading the fine print. All it takes is some special language on their advertising materials. In April 2005, the U.S. Securities and Exchange Commission set forth regulations that require commissioned financial professionals to include the following language on their advertising materials:

"Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interests. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons' compensation, may vary by product and over time."

How does this differ from an investment advisor?

For starters, registered investment advisors are required to act as a fiduciary. What’s that? It means at Index Fund Advisors we are required to act at all times for the sole benefit and interest of our clients. We owe a duty of undivided loyalty and utmost good faith, and we are prohibited from engaging in any activity conflicting with the interest of any client. While that may seem too good to be true in today’s investing landscape, IFA wears their fiduciary designation as a badge of honor.


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