A Broker acts as an intermediary between an investor and a securities dealer and is compensated through commissions. By law, a broker is prohibited from giving investment advice not incidental to a product they are selling. Recent court rulings have reconfirmed the necessity for a stockbroker to register as an investment advisor if he or she is going to act in the fiduciary capacity of a registered investment advisor. “In March, a U.S. Court of Appeals for the District of Columbia tossed out SEC Rule 202, the so-called Merrill Lynch rule that, for eight years, had allowed registered reps – formerly known as brokers – to offer fee-based brokerage accounts….reps offering the accounts will have to convert them to another compensation arrangement – or register as investment advisors. (And few large broker/dealers deem that a prudent option, since it bestows on their advisors a fiduciary standard with concomitant legal risk.).” This quote is from the May 2007 issue of Registered Rep Magazine.
A Registered Investment Advisor acknowledges and accepts a fiduciary responsibility regulated by the SEC. A Registered Investment Advisory firm is compensated on a fee basis for discretionary active and continuous management of an investor’s assets.
Investors should understand that working with an advisor that is a fiduciary does not guarantee that they will experience greater investment performance or reduced losses as compared to working with an advisor that is not acting as a fiduciary.