There are at least two types of investment professionals that directly interact with individual investors – investment advisors and stock brokers. While stock brokers aren’t legally obliged to act in an investor’s best interest, investment advisors, in general, are required to do so.
The US Financial Law laid out a fiduciary standard that guides the work of investment advisors registered with the Securities and Exchange Commission (SEC.) Registered Investment Advisor or RIAs are required to act in the investor’s best interest by reducing risks, eliminating unnecessary transaction expenses and avoiding any potential conflicts of interest.
In a perfect world, fiduciary standards obligate investment advisors to act in the investor’s best interest. Unfortunately, there are numerous corporate controversies that struck the investment world including the wide-scale Ponzi scheme orchestrated by Bernie Madoff and company.
An individual investor might ask; “what are those investment advisors thinking?” Similarly, one might speculate a possible conflict of interest, in which the investment advisor act not in the investor’s best interest but based on his own monetary gains.
According to a TD Ameritrade study regarding investment behaviors and perceptions, only about 26 percent of individual investors are aware that RIAs are legally obligated to act in an investor’s best interest. Needless to say, most individual investors are skeptical about their dealings with investment advisors and stock brokers.
It should also be noted that per the study only 5.5 percent of investment advisors in the United States are RIAs and about 3.9 percent are registered dually, meaning they are also licensed to sell and promote products which may or may not be in line with an investor’s best interest.
Hence, only about one tenth of investment advisors are guided by a fiduciary responsibility to act in an investor’s best interest. On the contrary, nine of out 10 investment advisors are independent and abide by their own ethical and moral standards.
Investment advisors represent individual investors in numerous financial transactions. In a layman’s concept, the representation alone gives birth to the responsibility of investment advisors to act based on investors’ best interest, needing no financial law or fiduciary standard to obligate them.
However, in today’s harsh business environment, such is quite impossible. The need for stricter guidelines and more concrete fiduciary standards should be addressed in order to revive investors’ confidence in investment advising.
The need for a more educated and financial literate investors should also be addressed for them to protect themselves against fraudulent financial transactions and investments.