Registered Investment Advisor

You need to know who your “Financial Advisor” serves.

River Wealth Management, LLC operates as a Registered Investment Advisor. We manage investment portfolios and provide financial planning and other services for a fee. We have a legal obligation to serve our clients’ interests only, even to the exclusion of our own.

Alternatively, anyone who sells mutual funds and variable annuities is a sales rep. and works for a brokerage firm, not you.13-things-financial-advisor-03-sl

Anything that results in a commission being paid to an “advisor” by a broker or insurance company represents a serious conflict of interest between the advisor and you, the buyer. You should know how much the agent is being paid to recommend it to you.

It really is that simple.

However, most people assume that the guy who manages their life saving is a fiduciary, because he/she is family, a friend, a friend of a friend, or because that’s how it felt when they were being courted. That feeling is not an accident. The majority of the sales rep’s training is dedicated to building trust and maintaining relationships. He/she is paid to make you feel good. And yes, . . . everyone is trained to call on family and friends first.

Registered reps working for the big brokerage firms are mostly very nice people and believe they work for you, but they don’t. They work for the brokerage firm. Every second of training, every email, every brochure, every phone call, every presentation, every recommendation, every birthday card, and every dollar spent on marketing is designed to build trust and sell as many mutual funds and annuities to as many people as possible.

To be fair, we have to market our services as well, and we try to keep our clients happy with the services we provide. We understand that to do business, our client have to know, like, and trust us. The big difference is . . . “to what end?” We serve our clients interests exclusively.

Registered representatives, who are also often insurance agents, are legally required to serve the best interests of the brokerage firms and insurance companies.

The entities below are some of the players in the financial services industry. You need to know what they do and who they serve.

Corporation – Supposedly has a fiduciary obligation to shareholders, in practice serves C-level officers and board of directors.

Investment Bank – Serves corporations that need to raise capital – fiduciary obligation is to corporation and flows accordingly

Broker/Dealer – Makes primary market for securities packaged by investment bankers – fiduciary obligation is to the investment bank.

Financial Adviser (FA) – Generic term used to describe all client facing representatives in the financial services industry. Title provides no clarification about who they serve or what they do.

Registered Representative (RR) – Most people refer to this person and anyone else associated with securities as a “Stock Broker”. Sells securities for Broker/Dealer – fiduciary obligation is to the broker/dealer – has little more legal obligation to clients than a car salesman.

Insurance Company – Fiduciary obligation of a stock insurance company is the same as the corporation above. Fiduciary obligation of a mutual  insurance company is to the policy holder.

Insurance Agent – Fiduciary obligation is to the insurance company even if they claim to be an independent agent.

Insurance Broker – Fiduciary obligation is legally to the client. Still paid by insurance company the same amount as an agent and not required to disclose compensation.

Registered Investment Adviser (RIA) – Fee-based portfolio management and financial planning/management services. Fiduciary obligation is to the client. Paid by the client. No obligation to anyone but the client.

Investment Adviser Representative (IAR) – Fiduciary obligation is to the client. Paid by the RIA to serve the client.


These are all terms used to describe people who are often trusted to advise and help clients make important financial decisions that can impact families for generations.  These terms are not interchangeable!  Each of these “titles” are very different and very significant because its that title that defines your legal business relationship and determines whether you are “the boss” or a sales quota. In a world of financial smoke & mirrors, this is important stuff. You need facts. . .

Two critical legal concepts are involved in determining whether you are being served or sold in today’s financial services arena.  These are the concepts of agency and standard of care.  A great deal of debate is waged in the financial services industry because of the human tendency to act, under most circumstances, in one’s own self interest. In an agency relationship, an agent is required to act in the best interest of another (the principal) even to the exclusion of his/her own interest.  An agent generally has an obligation to act under a fiduciary standard of care on behalf of the principal in the relationship.  The suitability standard of care is substantially more relaxed. “You can satisfy the suitability standard by recommending the least suitable of the suitable options, as long as it falls within the general suitability test,” says Barbara Roper, director of investor protection for the Consumer Federation of America.”

The key to understanding which end of the stick you get is knowing whether you or someone else is the principal in the relationship.

The stakes are high. Who are the players? Who do they serve?

040212bucks-carl-sketch-blog480Investment Adviser Fiduciary Standard vs. Broker-Dealer and Agency Suitability

The financial industry and lawmakers have not agreed on a standard of accountability for providing investment advice to retail investors. Section 202(a)(11)(C) of the Investment Advisers Act of 1940[4] exempts from the definition of an Investment Adviser (and therefore the associated fiduciary standard) “any broker or dealer whose performance of such services is incidental to the conduct of business as a broker or dealer and receives no special compensation therefor.”

You have to think about this for a minute to connect the dots. What this means is the broker/dealer’s or Registered Representative’s “advice” about investments is “incidental” to its business of generating commissions by selling investment products. That advice is usually provided in the form of a financial plan, estate plan, retirement plan, portfolio review, insurance needs analysis, “mutual fund research”, etc. As long as the broker/dealer doesn’t charge anything for that “advice”, it is not held to a fiduciary (best interest of client) standard. Those services are in fact, sales tools (manipulative advertising) and can legally be used to induce a client to purchase products (mutual finds, insurance, annuities, “alternative” investments, etc) that may not actually be in his best interest.

For over twenty years, there has been great debate regarding the fiduciary standard and to which advisors it should apply. In July 2010, The Dodd–Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures, including enhanced disclosures and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisors regulated by the 1940 Act. As of March 2013, the SEC has yet to extend the fiduciary duty to all brokers and advisors regardless of their designation. Opposition to the fiduciary standard maintains that the higher standard of fiduciary duty, vs the lower standard of suitability, would be too costly to implement and reduce choice for consumers.”

Financial Advisor – This is a much over used term that can can be used by almost anybody and carries no particular distinction or level of credibility. FINRA (Financial Industry Regulatory Authority) describes several professional groups who may use the term financial advisor to include; brokersinvestment advisersaccountantslawyersinsurance agents, and financial planners.

Registered Representative (RR) as the name implies, represents a broker/dealer firm.  The RR has a legal fiduciary obligation to his/her employer (the principal), to always act in the employer’s (not the client’s) best interest, and to only meet a “suitability standard” when making recommendations to clients.  To be very clear, this is most of the big name brokerage firms you see advertised on TV and in business magazines. With few exceptions, the RR in today’s market is compensated mostly by commissions on sales of financial products such as mutual funds, annuities, non-traded real estate trusts, gas & oil partnerships, and other “alternative investment” products.

Insurance agent vs insurance broker.  The insurance agent has an agent > principal relationship with the insurance company. That is, they represent the carrier’s interest. The insurance broker has an agent/principal relationship with the insured or policy holder (you). In practice however, insurance agents and brokers are both paid commissions by the carrier and are thus motivated by the same economic interest to generate premium sales. This puts the insurance broker’s fiduciary role at risk.

CPAs  Accountants have historically played a valuable role in helping their clients with retirement planning, tax management, and estate planning, and have very influential roles as usually highly paid trusted advisors with a fiduciary obligation to serve the clients best interests. In the past, this has meant keeping arm’s length relationships with banks, insurance agents, and brokerage firms. However, when a CPA firm decides to accept commissions from the sale of insurance, mutual funds, or annuities, it puts their fiduciary role at risk. How do you know if they are advising in your interest if a big commission hinges on your taking their advice?

A Registered Investment Advisor (RIA) is an investment company registered with the Securities and Exchange Commission (SEC) or a state’s securities regulatory agency. In Alabama that is the  Alabama Securities Commission.  Persons who represent an RIA are called Investment Advisor Representatives. Unlike the registered representative or the insurance agent, IARs and the RIAs they represent have a legal obligation to put clients’ interest’s first. That means the client is the principal in the principal/agency relationship.

One of the greatest benefits of hiring a Registered Investment Advisor is its ability to manage a client’s portfolio on a discretionary basis. That means it can trade a client account at discretion without calling the client for permission on every transaction. Registered Representatives are required to get permission before any transaction because commissions are involved. This makes it impossible to effectively manage a portfolio of traded securities.

IARs and Registered Investment Advisors (individuals or firms) receive compensation for giving advice about stocks, bonds, exchange traded funds, real estate investment trusts, oil & gas partnerships, or any other marketable securities. It is also common for investment advisers to manage portfolios of securities. RIAs may also charge to give advice concerning mutual funds, variable and fixed index annuities, and life, health, disability, personal and business liability, property and casualty, and long-term care insurance. RIAs may also provide consulting and planning services concerning retirement, estates, business succession planning, etc.  RIAs generally are paid in any of the following ways: a percentage of the value of the assets they manage for clients, an hourly fee, or a fixed negotiated fee.

Sounds like a no-brainer . . . right? Everyone who has a choice would rather have an advisor who is legally obligated to serve their best interests, . . . right? Unfortunately, where there is money to be made (sheep to be shorn), there will always be wolves in sheep’s clothing.  There is a lot of money to be made selling mutual funds, fixed index and variable annuities, life insurance, non-traded REITs, Oil & Gas Partnerships, Equipment Leases, and other “alternative” investment products. Most of theses products are incredibly complex, have substantial up-front commissions or contingent deferred sales charges (CDSC) of up to 20% as well as ongoing internal management fees, mortality, and administrative costs, that can add up to 3% or more annually to their overall cost.

To muddy the water even more . . . The big brokerage houses routinely create RIA and insurance subsidiaries and have their representatives  registered as RRs, Insurance agents, and IARs.  This allows them to charge a fee for planning and asset management, and still collect commissions on sales of products used to implement plans. This practice that has been challenged repeatedly in the courts but is unfortunately very common among all of the major players in the industry for the express purpose of circumventing the intent and spirit of the law. It allows a firm to create the facade of fiduciary obligation in order to gain a client’s trust, then sell financial products that may meet a suitability standard but are often not in the clients best interest. 


The Registered Investment Advisor often holds insurance and advanced securities licenses for the express purpose of comparing products and recommending what best meets clients needs. However, not all RIAs operate on a fee-only basis. The IAR can legally sell products and collect commissions if he discloses the conflict of interest to the client. Many do not.  If a RIA offers a commissioned product as a solution to a client’s problem, he/she should disclose that there is a conflict of interest and how much he/she will compensated for recommending the commissioned products.


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