How to find the best person to help you manage your life savings

MarketWatch (July 7, 2014 8:04 am) -- Who should investors turn to for financial advice?

Brokers, advisers and planners have different training and credentials and charge based on varying fee models and commissions for products they recommend. And even when markets are strong, as they are now, it is important to know what professional standards apply in each case.

Some are held to a so-called fiduciary standard, which requires them to act in a client’s best interest. But others aren’t. The Dodd-Frank Act, signed into law in 2010 amid the financial crisis, gave the Securities and Exchange Commission authority to require brokers to meet the fiduciary standard, but the SEC is still pondering a possible rule.

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For now, investors should interview investment professionals just as they would a job candidate, says Ohio Securities Commissioner Andrea Seidt, president of the North American Securities Administrators Association.

Inquire about the credentials and licenses they hold to help ensure you are entrusting your money with someone who can meet your needs. Ask how they are compensated, whether they’re paid by the hour, are on retainer, make a commission from trades, or collect a percentage of the assets they manage. Check their backgrounds with state regulators, and run names through BrokerCheck, a website run by the Financial Industry Regulatory Authority, or Finra, an industry-funded Wall Street watchdog.

“People spend more time researching a car for $20,000 than they do when handing over their life savings,” Seidt says.

• Brokers. Brokers can buy and sell securities — stocks, bonds, mutual funds and other products — for customers or for their own accounts. They must pass exams to qualify with state securities regulators and Finra. They are often employed by Wall Street banks, whose products they may favor even if a better or lower-cost option is available from another firm.

Some brokers like to call themselves “financial advisers” or “investment consultants.” But they aren’t obligated to give what they consider the best advice. Instead, they are required only to recommend “suitable” investments based on a customer’s risk profile, financial status, age, investment goals and liquidity needs, among other factors.

That means, in practice, that they can recommend investments with high fees or conflicts of interest that can benefit themselves or their firms ahead of the clients.

“Unfortunately, when the market is going up in value like it is now, unsuitable investments are really hard to identify,” says Jason Doss, president of the Public Investors Arbitration Bar Association.

Unsuitable investments become more obvious when markets sour, exposing unforeseen risks. Finra opened 560 arbitration cases involving the sale of unsuitable products to investors through May, on pace to surpass last year’s total of 1,243 cases.

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• Registered investment advisers. These advisers, also known as RIAs, are typically regulated under state and federal laws that require them to act solely in the best interests of their clients.

Registered investment advisers who manage less than $100 million must register with their state securities agency, while those who manage more than that are generally required to register with the SEC. RIAs are also required to disclose conflicts of interest.