President Barack Obama called for new regulations this week to ensure that brokers who work with retirement accounts put investors' interests first. He wants to hold brokers to a higher standard. But how do you know if your financial advisor is putting your interests above his or her own bottom line?
You won't know unless you ask these three questions:
Are you a broker, a registered investment advisor or a certified financial planner?
Brokers, regulated by the Financial Industry Regulatory Authority (FINRA), are required to make recommendations suitable to their clients' financial needs and goals. Under the "suitability" rule, a broker's loyalty is to the financial services firm that he or she works for, and not necessarily the client.
A registered investment advisor is registered and regulated by the Security and Exchange Commission (SEC) or a state's securities regulator. These regulatory agencies require that a registered investment advisor put their client's best interests above their own, upholding a "fiduciary standard."
For example, putting a client's interests above their own financial interest means that a registered investment advisor can't buy or sell investments that may result in a higher commission for the advisor, or the advisor's investment firm, unless it is the best investment for the client.
Some brokers and registered investment advisors may also be certified financial planners and have a "CFP" designation after their names. These planners have gone through rigorous testing on retirement,college, estate planning and other personal finance topics.
If they are actually providing financial planning services to clients, then they have a fiduciary duty. That requires them to place the interest of the client ahead of their own at all times.