Investment adviser

Individuals or firms that receive compensation for giving advice on investing in securities such as stocks, bonds, mutual funds, or exchange traded funds are deemed to be Investment Advisers (U.S. financial law spelling uses adviser, while elsewhere the spelling is advisor).

Investment Advisers (IA) are subject to regulatory authority depending on their classification. An Investment Adviser who registers with the Securities and Exchange Commission (SEC) must adhere to a fiduciary standard which acts in the client's best interest. An adviser registered with the SEC is known as a Registered Investment Adviser (RIA).

Investment advisers who manage less than $100 million in assets must be registered with the state securities agency in the state where they have their principal place of business.

Anyone registered with the FINRA typically makes commissions and fees from the products they sell (brokerage or mutual fund company). They must provide to their clients products that are "suitable" (the suitability standard), but not necessarily the cheapest or the best.

Regulations
Section 202(a)(11)(C) of the Investment Advisers Act of 1940 exempts from the definition of an Investment Adviser (and therefore the associated fiduciary standard) "any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who receives no special compensation therefor."

In Release 34-51523; the Financial Industry Regulatory Authority (FINRA), the US Securities Self Regulatory Organization (SRO) having authority over Brokers and Dealers, determined that Broker-Dealers are "not to be deemed investment advisers" and therefore are not subject to the same fiduciary standards as Investment Advisers when recommending investments to clients, as are Registered Investment Advisers (RIA).

Registered Representatives (RRs) affiliated with a Broker Dealer are therefore required to recommend securities that are deemed "suitable" for non-institutional clients.

Suitability
Suitability means that a broker can sell any fund or any investment as long as it fits the purpose. For example, if stocks are suitable for an investor, then it doesn't matter if a broker advises an 8% load stock fund that has 3% in annual fees because it's agreed that stocks in general are a suitable, thus any diversified stock mutual fund will do.

Suitability is quite different than fiduciary standard. Under a fiduciary standard, not only does an investment adviser have to recommend suitable investments, the adviser must recommend funds that are in the best interest of the client. Clearly, a fund with an 8% load and 3% in fees is not in the best interest of investors. Low-cost index funds are in the best interest of clients.

This is the difference between investment recommendations of brokers under a suitability standard and those of investment advisers under a fiduciary standard.

Background checks
Those considering a business relationship with an investment adviser (financial adviser, broker, or investment firm) should perform due diligence to validate background credentials and complaints on file. The SEC and FINRA provide free tools to help consumers with this process.

Investors should use both tools. If a financial adviser cannot be found in SEC's Investment Adviser Public Disclosure (IARD) database, but is found in FINRA's Broker Check, then this adviser should be considered as a product salesperson.

SEC Investment Adviser Public Disclosure
The SEC's Investment Adviser Public Disclosure (IAPD) database provides information about current and former Investment Adviser Representatives (IARs) and Investment Adviser firms registered with the SEC and/or state securities regulators.
 * Investment Adviser Search, from the SEC
 * Choose either Investment Adviser Representative (broker or advisor name) or Investment Adviser Firm (company name) to start.

If a broker name was entered, the report will contain a link to the FINRA's Broker Check; which provides additional information such as a state-by-state breakdown where a broker is licensed to practice.

If an adviser firm was entered, the firm's complete SEC registration forms are displayed on the left menu. Select Part 2 Brochures for a plain-English description of how the firm manages money, especially fees and costs.

FINRA BrokerCheck
The Financial Industry Regulatory Authority, known as FINRA, is the largest non-governmental regulator for all securities firms doing business with the United States public—more than 5,000 firms employing more than 660,000 registered representatives. FINRA was created in 2007 through the consolidation of NASD and NYSE Member Regulation.

FINRA BrokerCheck is a free tool to help investors check the professional background of current and former FINRA-registered securities firms and brokers. It should be the first resource investors turn to when choosing whether to do business with a particular broker or brokerage firm. Note that financial advisers can also be registered brokers.
 * BrokerCheck
 * Enable browser cookies. At the report summary, select "View Full PDF Report" (upper right corner) to get the full details. If applicable, the FINRA report will contain complaints filed against the adviser.

Forum discussions

 * Ameriprise employees sue firm for lousy 401k choices, forum discussion.
 * Investment Advisor or do it ourselves, forum discussion.