Is Your Financial Advisor Required to Act in Your Best Interests?

When the Ponzi scheme perpetrated by Bernard Madoff came to light late last year, it was perhaps the most grandiose in a long line of incidences of a financial advisor abusing the trust of his or her clients.  Coupled with the 2008 performance of most investment accounts, many customers and potential customers of financial advice are wondering who they can trust.

One of the challenges inherent in the advisory business is that most registered “advisors” are not required to act in their clients’ best interest.  Surprised?  You’re not alone.  A TD AMERITRADE study on investor perception conducted in 2006 demonstrated that only 26% of investors understood that only investment advisors have a fiduciary responsibility to act in the investor’s best interest in all aspects of the financial relationship.  In short, brokers do not bear this responsibility.  Furthermore, the percentage of all advisors that worked solely under the Registered Investment Advisor (RIA) model 18 months ago was only 5.5%.  An additional 3.9% were dually registered, which means that they are licensed to sell products under which they are not required to act in investors’ best interest, as well as provide advice under the RIA model, where they are so required.  Bottom line:  fewer than 10% of all advisors were required to act as fiduciaries in any capacity.

Of course, there is now a requirement for brokers to disclose this fact in the fine print of their materials.  Clearly, though, the message isn’t resonating.  The TDAmeritrade study indicated that “…if investors knew that stockbrokers were not required to act in their best interest in all areas of the financial relationship, 70% would not use them”!


“If investors knew that stockbrokers provided fewer investor protections than investment advisors, 63% would not seek financial advice from them.”
“If investors knew that stockbrokers were not required to disclose all conflicts of interest, 70% would not seek advice from them.”

For various reasons, financial literacy is an ongoing issue in our country, and the consequences are serious.  Many blame our current macroeconomic issues on the lack of basic financial understanding on the part of the average citizen.  I think there is a lot more to it than that, but I do believe enhanced financial literacy will lead to reduced pain for hardworking Americans. BOLA TANGKAS