A recent AARP survey confirmed that 76% of Americans still mistakenly believe that all financial advisers must act in their clients’ best interest.  It just feels natural to believe that your adviser has your back, but legislation over the past 100 years proves otherwise. If you don’t know how your adviser is licensed, then you won’t know how they are regulated, motivated and compensated!

While this topic may not seem as glitzy as my last article on gold, it is more important, and impacts your investments and your wallet more than you’d like to believe.  This article will be the first in a series that explores why and how financial advisers work on your behalf.


Before we jump into why you should care and what this means to you, I think a little history is in order to show how we’ve come to where we are today. If you think you won’t like the history part, don’t worry, I’ll keep it really short.

Brokerage is as old as barter and trading, and is likely the second oldest profession.  As far back as the 13th Century, King Edward decreed that English brokers should be licensed.  In the U.S., it was not until 1911 that the state of Kansas passed a securities law registering securities salesmen.  By 1913, twenty-three other states had passed similar legislation.  But it wasn’t until after the financial devastation caused by the 1929 stock market crash that federal securities legislation finally addressed many of the abuses prevalent at that time.

From 1933 to 1940, Congress passed 5 major pieces of legislation regulating companies, their securities, and related advisers. 1940 saw two major pieces of legislation, the Investment Company Act which created the “mutual fund” and the Investment Advisers Act which created “Investment Advisers” and distinguished them from “brokers.” To this day, as the survey shows, most people still confuse the two, and mistakenly believe they are working with an Investment Adviser when they are really dealing with a broker.


Part of the confusion lies in the virtually endless list of titles that advisers use, including financial adviser, financial planner, vice president of investments, etc.  Titles, however, are misleading because it’s really the license that matters most.  So, ignore the soothing titles and fancy certificates hanging on the wall and dig a bit deeper into the license your adviser holds.


 The license is important because it determines what your financial adviser is allowed to do, and more importantly, what they are motivated to do.  Financial services licenses can be broken down into 3 main categories:  Insurance,  Securities  and Advisory.   This article is focused on the last two since they provide the services most directly related to your portfolio  and its investments. The main “Securities” license is a Registered  Representative (“RR”) and the only “Advisory”  license is a Registered Investment  Adviser (“RIA”).

Your adviser is most likely a RR since 93% of advisers in the U.S. are RRs (600,000)  versus only 40,000 RIAs. The following  list contains the three main legal differences  between RRs and RIAs:




Sell securities

Provide advice & manage portfolios


Your Agent

Your Fiduciary


Investments must be “suitable” for you

Investments must be in your best interest

All of the confusion  created by the above differences  should have been solved 70 years ago when the Investment Advisers Act of 1940 created a duty for “Investment Advisers”  to put their clients’ interests first.  The brokerage industry lobbied hard to create section 202(a)(11)(C) of the 1940 Act which specifically  exempts brokers from being Investment  Advisers so that they could not be held to the higher fiduciary standard.   To this day, brokerage  firms staunchly define their RR’s services as brokerage services and not advisory services.  Behind closed doors in arbitration proceedings, you’d discover that brokerage  firms will not admit that “advice” is being given, nor that there is a duty for their RRs to act in your best interest.  Since the RR is not legally providing  you advice, who is? Ironically,  as your agent, your broker is merely following  your advice.


It is important to understand how your adviser is regulated, motivated and compensated since it directly impacts you and your money.  There are two main licenses that an adviser can hold and they are quite distinct. In the eyes of the law, the broker has a license to sell an investment product or service, where the Investment Adviser has a license to provide advice and manage portfolios.  Unfortunately, the investing public does not know a difference exists, let alone what those differences are, and how they play out over time.

Now that we’ve covered regulation, in the next issue we’ll move on to motivation and compensation to see how this difference translates into the types of investments recommended and portfolio services rendered over time.

This article originally appeared in Westlake Malibu Lifestyle Magazine.

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Robert KatchRobert J. Katch is the founder of Manchester Financial, an Investment Counsel/Wealth Management firm located in Westlake Village. For more information call 800-492-1107.

This material provided for general and educational purposes only, and is not legal, tax or investment advice. For each strategy or option mentioned, there are detailed tax rules that must be followed.