COVID-19 UPDATE: We're Open and Ready to Serve Our ClientsLearn More Here

Investment Recommendations Don’t Always Equate To a Customer’s Best Interests

SEC’s Regulation BI May Not Be Protecting Investors The Way They Think 

It has been nearly seven months since the SEC’s Regulation Best Interest (BI), a rule mandating that brokers NOT market themselves as financial advisors unless they actually are dually registered to be one, went into effect. The aim of this distinction is to let investors know whether they are working with someone who is bound to act in their best interests or not.  

While brokers are supposed only to recommend financial products to customers that are suitable for them, this recommendation can also be based on what product will earn them the highest commission. This potential conflict of interest can be financially disadvantageous to an investor.

Meanwhile, registered investment advisors do have a fiduciary duty to act in a clients’ best interests when making investment recommendations, and they are paid a fee instead of a commission for said recommendations. 

This means that they aren’t likely to have the same conflicts of interest as commission-earning brokers, who may be pushing a product to a customer because it benefits their wallets as well.  And while the latter option could end up proving to be beneficial to the customer too, this isn’t always the case. Sometimes, huge investment losses can result. 

At Shepherd Smith Edwards and Kantas (SSEK Law Firm at investorslawyers.com), our securities litigation attorneys represent investors in recovering losses they sustained because a broker-dealer and/or its registered representative made unsuitable investment recommendations. Call (800) 259-9010 or contact us online today. SSEK Law Firm represents investors nationwide.

Many Investors Are Unaware Of Differences Between Brokers and Investment Advisors  

With Regulation Best Interest, stockbrokers are not allowed to call themselves financial advisors in their marketing materials unless they are, in fact, also registered investment advisors. The hope is that this will help investors know which one they are working with. 

A joint study by the SEC’s Office of the Investor Advocate and Rand Corp. found that over 40% of investors mistakenly believe that both advisors and brokers must act in their clients’ best interest when brokers only have to fulfill the suitability standard. Satisfying this standard means that the recommendation they are making is suitable for a customer’s investment goals, financial profile, risk tolerance level, portfolio, age, and other criteria.

Some critics of the rule are worried that it still leaves room for brokers to go around it. According to CNBC, a Consumer Federation of America report noted that the SEC’s regulation doesn’t prevent brokers from referring to themselves in other ways that might cause investors to still think they are financial advisors. Examples of this are financial consultant, retirement consultant, retirement counsellor, or wealth manager.  

Also, because there are more than 359 dually registered broker-dealers with registered representatives that can act as both fiduciary financial advisor and broker —SEC data notes that approximately 60% of the more than 500,000 registered brokers are also registered investment advisors —Regulation BI still allows these stockbrokers to call themselves advisors even when they are in selling mode. 

Experienced Stockbroker Fraud Law Firm Fighting For Investors for More Than 30 Years 

Our broker fraud lawyers at SSEK Law Firm represent investors in their Financial Industry Regulatory Authority (FINRA) arbitration claims that are caused by unsuitable investment recommendations, misrepresentations and omissions, excessive trading, churning, conflicts of interest, and other types of securities fraud. 

Call us today at (800) 259-9010 to request your free, no-obligation case consultation.

Contact Information