Washington State Department of Financial Institutions

Where to Turn for Help with Investments

What are the Differences in Providers' Legal Obligations?

Investment services providers not only offer different types of services and charge for them differently, they also are subject to different federal and state regulatory requirements and have different legal obligations to their customers. Important distinctions - including whether the provider has a clear obligation to act in your best interests or disclose conflicts of interest - depend on which legal category the provider falls into under our securities law.

Securities laws recognize two types of providers - investment advisers, who are in the business of giving advice about securities, and brokers, who are in the business of buying and selling securities on behalf of customers.

Investment advisers are subject to a fiduciary duty. That means they have to put your interests ahead of theirs at all times by providing advice and recommending investments that they view as being the best for you. Investment advisers also are required to provide up-front disclosures about their qualifications, what services they provide, how they are compensated, possible conflicts of interest, and whether they have any record of disciplinary actions against them. They are regulated directly by either the U.S. Securities and Exchange Commission (SEC) or by state securities regulators, depending on the amount of assets they have under management. You can find out whether a person or firm is registered or licensed as an investment adviser in Washington by calling DFI at 360-902-8760. For all other states, contact your state securities regulator using the contact information on the NASAA website: www.nasaa.org or by visiting: www.adviserinfo.sec.gov.

Brokers are generally not considered to have a fiduciary duty to customers, although this standard may apply in certain limited circumstances. Instead, brokers are required 1) to know your financial situation well enough to understand your financial needs, and 2) to recommend investments that are suitable for you based on that knowledge. They are not required to provide up-front disclosure of the type provided by investment advisers. In addition to being regulated directly by the SEC and by state securities regulators, brokers are subject to regulation by industry self-regulatory organizations, including FINRA and the New York Stock Exchange. You can find out whether a person or firm is registered or licensed in Washington as a broker and check out their disciplinary record by calling 360-902-8760. For all other states, please contact your state securities regulator using the contact information on the NASAA website: www.nasaa.org.

Financial planners are not separately regulated as planners. Instead, their regulation and the level of responsibility they owe customers depends on the type of services they provide. Planners who provide investment advice must be registered or licensed as investment advisers and are subject to a fiduciary duty. Those who trade securities must be registered or licensed representatives of brokers. Some financial planners perform other activities that do not involve securities and therefore are not regulated under laws governing either investment advisers or brokers.

The legal situation is further complicated by the fact that different standards can apply when investment providers serve as both investment advisers and brokers. For example, investment advisers who also buy and sell securities for customers must meet the requirements applicable to both investment advisers and brokers. The same is not true of brokers. They are permitted to offer investment advice in connection with their brokerage services without being regulated as investment advisers. As a result, the advice they offer is subject to the suitability standard that governs brokerage activities rather than the higher fiduciary duty that applies to investment advisers.

Source: The Coalition on Investor Education

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