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Know Your Rights – Understanding Stock Brokers’ and Investment Advisors’ Duties to Their Clients

Posted: Sep 09, 2015 | Posted in:

If you are like most casual investors, you probably have a basic understanding of the terminology used to describe the different people involved in managing your investment portfolio. But, you may not realize the legal implications of a person being in one role versus another. When it comes to who is selling you stocks or helping you make decisions about your investments, understanding these roles can be critical to determining your rights in the event that something goes wrong.

One of the key issues when it comes to understanding the roles of stock brokers, investment advisors, and other securities professionals is knowing who is obligated to act with your best interests in mind. Not everyone who sells stocks or gives investment advice is legally obligated to put your interests first. In fact, this “fiduciary” standard currently applies only to a select group of firms and individuals.

Understanding the Difference Between Stock Brokers and Registered Investment Advisors

Most investors work with either a stock broker or a registered investment advisor, though studies show that only about one in five have a firm grasp of the differences between the two. Yet, as noted above, understanding the difference is critically important. A stock broker is a salesperson – someone who receives a commission for getting investors to take the plunge. Stock brokers are also commonly referred to as “financial advisors,” which only further contributes to the confusion around fiduciary duties.

In contrast, registered investment advisors are firms and individuals that get paid to provide advice, make recommendations, and furnish analyses of stocks and other investment opportunities. The term “registered” refers to registration with the Securities and Exchange Commission (SEC) or a state securities agency. Registered investment advisors must meet certain requirements, and registration with the SEC requires a minimum value of assets under management.

Stock Brokers’ Suitability Obligations vs. Investment Advisors’ Fiduciary Duties

Stock Brokers and Suitability

Stock brokers and financial advisors owe a duty to sell only sell “suitable” investments. However, this does not necessarily mean that they must put their customers’ interests first.

For example, an investment could be suitable – aligning with the investor’s age, risk tolerance, and financial condition – but the sale could still be primarily motivated by the stock broker’s desire for personal gain. Stock brokers also lack any sort of duty to continually monitor their customers’ investments or provide advice regarding future risk aversion. Read more about financial advisors’ obligations and examples of stock broker fraud.

Registered Investment Advisors and Fiduciary Duties

Registered investment advisors (RIAs), on the other hand, are fiduciaries who are held to a higher standard of care. This fiduciary duty means that RIAs are legally prohibited from making decisions that are beneficial for themselves but detrimental to their clients. Thus, not only must RIAs make suitable investment recommendations, but they must also provide adequate disclosures and maintain an ongoing, active role in managing their clients’ investments.

In any case, stock brokers and RIAs who breach their respective duties can be held liable for their clients’ resulting losses. However, by understanding your stock broker’s or investment advisor’s duties, you can make more-informed decisions about your investments and be better prepared to take action if something goes wrong.

Speak with an Attorney at Zamansky LLC

The stock broker fraud lawyers at Zamansky LLC provide experienced, aggressive representation for victims of stock broker fraud and investment advisor misconduct. If you have questions about your legal rights, feel free to call us at (212) 742-1414 or contact us online to schedule a free consultation.