Protecting (or Cracking) the Nest Egg: Why Titles and Contracts Matter When Selecting a
Financial Professional By Anthony F. Fata and Delaney Slater M ost attorneys interact with financial professionals at some point during their careers.
any rely on them for advice on retire- ment savings. Some interact with them in the course of work on estate plans, trusts, or conservatorships. Still others may recommend financial professionals to clients with newfound wealth from personal injury matters, business sales, or inheritances. Thus, attorneys should have a basic understanding of the types of financial professionals with whom they are dealing, the applicable standard of conduct, and the scope of the financial professional’s responsibilities. This article explains some of the differences between financial professionals, the rules and stan- dards that apply, and contract terms to be alert for with regard to changes in default obligations. Distinctions between Brokers and Advisors Financial professionals hold themselves out with a variety of titles (e.g., broker, investment advisor, financial advisor, financial planner). These titles often dic- tate the default obligations of the financial professional. Brokers and advisors have been around for decades and played prominent roles in the 1920s and 1930s. Historically, the law treated brokers like salespeople with no special duty to their customers. By con- trast, the law treated investment advisors as “fiduciaries” with heightened obligations to their clients. (The remainder of this article will drop “investment” and simply use the term “advisor” – spelled with an “o” – although the federal statutes spell it with an “e.”) This distinction may lead to different results when investments go awry. For
example, assume a broker and an advisor tout the same stock using the same research script and later learn the information in the script may not pan out. Because brokers were treated like salespeople, and advisors like fiduciaries, they have dif- ferent obligations (and liability) to their respective investors. By default, the broker has no duty to monitor an investment and recommend selling when appropri- ate, but advisors do. As a result, investors may realize significantly different returns depending on the type of professional that they choose. Recent efforts to bridge this gap between brokers and advisors led to some change but not harmonization. The U.S. Securities and Exchange Commission (SEC) clarified that brokers are more than mere salespeo- ple but did not explicitly hold them to a “fiduciary” status. The debate and remain- ing distinction underscore the importance of knowing whether one is dealing with a
broker or advisor and, equally important, of reading account opening paperwork to ensure no disclaimer of default obligations. Brokers far outnumber advisors: approximately 625,000 brokers are reg- istered in the United States. By contrast, fewer than 50,000 advisors are registered. Thus, investors are far more likely to deal with brokers, who have a lower standard of care. Brokers Brokers—also known as “registered rep- resentatives”—buy and sell securities for clients. Brokers charge a “commission” for each transaction, as explained further below. Technically, “brokers” are firms, and the individuals are “representatives,” but many call the individuals “brokers” and the firms “brokerage houses” or “broker- dealers” (a special type of brokerage house that buys and sells securities for its own accounts, as well as for customer accounts).