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What to Know Before Hiring a Dually Registered Advisor

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Finding the right financial advisor can often feel like picking through a line of thunderstorms. For airline pilots — whose schedules, job stability and financial situations are uniquely complex — the stakes are high. Among a sea of options, one option that may stand out is the dually registered advisor. But there are some things you should know about this type of advisor before you choose them to protect and grow your hard-earned assets.

Different Industry Standards: Suitability vs. Best Interest vs. Fiduciary

To understand the potential pros and cons associated with dually registered advisors, it’s important to understand the standards by which different types of financial professionals operate.

The suitability standard is a common benchmark advisors must follow. For example, broker-dealers follow the suitability standard, which means they must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer. “Suitable” sounds reasonable, but this standard doesn’t address potential conflicts of interest that could influence an advisor’s recommendations. The key here is that a suitable recommendation doesn’t necessarily equal the best recommendation.

Regulation Best Interest is another standard of conduct broker-dealers are required to meet when they make a recommendation of any securities transaction or investment strategy involving securities. This means recommendations must be in the best interest of the client, conflicts of interest must be disclosed, and they must exercise reasonable diligence and care. Just as their name implies, broker-dealer representatives sell investment products on a transactional basis. They’re typically paid a commission based on the products they sell, which means they’re often incentivized to maximize product sales.

The fiduciary standard (which includes both a duty of care and a duty of loyalty) sets a higher bar. The duty of care requires advisors to not only provide advice that’s in each client’s best interest but also execute that advice in the best way possible for the client. The duty of loyalty requires advisors to provide clients with full and fair disclosure of all material facts related to the advisory relationship, including notifying the client of any potential conflict of interest.

Fiduciary advisors seek to build a long-term, ongoing relationship with their clients, which allows them to provide recommendations in line with each client’s overall financial situation and goals for the future. Fiduciary advisors are typically fee-based, which means they charge a percentage fee based on the assets they manage on a client’s behalf. The benefit to this approach is that it aligns the advisor’s financial interests with those of the client.

You should be thorough in understanding what an advisor can do for you and how it aligns with your goals. If you only want to buy or sell a few stocks, it may make sense to contact your broker-dealer. But if you’re looking for an advisor to help guide all aspects of your financial life, you should consider working with a fiduciary advisor.

Why Dual Registration May Not Be a Bonus

When working with a fiduciary advisor, it’s essential to recognize that not all fiduciaries are the same. Some advisors are dually registered, which means they can switch between serving as a broker-dealer and serving as a fiduciary advisor. While this may sound like an advisor who must follow even more regulations, this type of dual role can actually introduce a potential conflict of interest between client and advisor.

For example, a dually registered advisor could help you establish a comprehensive plan but then recommend a specific investment product they may be incentivized to sell to earn a commission.

Key Considerations for Investors

When looking for an advisor, it’s essential to go beyond surface-level assurances and explore the intricacies of your would-be advisor’s registration(s) and ethical obligations.

Luckily, clients can take matters into their own hands by using resources like FINRA BrokerCheck to verify their advisor’s registration status. If it shows “B” for broker and “IA” for investment advisor next to the advisor’s name, it means they’re dually registered. Over and above that, clients should ask their advisor directly about any potential conflicts of interest that may arise during their relationship.

Conclusion

If you choose to do business with a dually registered advisor, it’s important to know which role your advisor is serving in at any given moment so that you can understand what standards are driving their recommendations.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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