Registered Investment Advisor firms receive compensation in the form of fees for providing financial advice and investment management. They sec investment advisers act required to act as a fiduciary.
This is very different from broker-dealers and their representatives, who provide recommendations for a commission. Broker-dealers and their representatives are not required to act as a fiduciary, they simply must make suitable recommendations for a client. In some instances a firm may be “dual registered”, meaning they are a registered investment adviser along with being registered as a broker-dealer. In that case they may provide advice for a fee and collect a commission on certain product sales. An IA must adhere to a fiduciary standard of care laid out in the US Investment Advisers Act of 1940.
To “promote compliance with fiduciary standards by advisers and their personnel,” on August 31, 2004, the SEC adopted Rule 204A-1 under the Investment Advisers Act of 1940 requiring investment advisers to adopt a code of ethics setting forth “standards of conduct expected of advisory personnel and to address conflicts that arise from personal trading by advisory personnel. Among other things, the rule requires advisers’ supervised persons to report their personal securities transactions. While “the rule does not require the adviser to adopt a particular standard, the standard chosen must reflect the adviser’s fiduciary obligations and those of its supervised persons, and must require compliance with securities laws. Although the rule contains certain minimum provisions, advisers have “substantial flexibility to design individualized codes that would best fit the structure, size and nature of their advisory businesses. The financial industry and lawmakers have yet to establish a consistent standard for providing investment recommendations to retail investors. Broker Dealer are therefore required to recommend securities that are deemed “suitable” for non-institutional clients.
RRs of a Broker-Dealer who also engage in the business of providing investment advice are required to affiliate with a Registered Investment Adviser. Fiduciary Standard” as defined under the US Investment Advisers Act of 1940 when providing investment advice to clients. This rule will effectively expand liability for recommendations of strategy. Over the years, investment advisors have been taught to know the customer’s suitability, objectives, time horizon and risk tolerance, and to limit speculative or aggressive recommendations based on information from the customer. Firms’ and brokers’ efforts to get to know their customers are now expressly governed by a reasonableness standard.
Firms and brokers should use reasonable diligence to retain their customers’ KYC information and keep it up to date. Section 913 of the Dodd-Frank Act mandated that the SEC study whether a uniform fiduciary standard should be applied to brokers and investment advisers. On March 1, 2013, the SEC issued Release No. 34-69013 to request information for a cost-benefit analysis to determine the anticipated economic impacts of moving forward with uniform fiduciary standard rulemaking.