Laws and Regulations that Govern Registered Investment Advisors
Registered Investment Adviser's are regulated under the Investment Advisors Act of 1940. This Act requires that investment firms compensated for advising others about securities investments must register with the SEC or state security regulators and conform to regulations designed to protect investors.
Section 206 of the Act is an anti-fraud section which has long been used in court cases as the basis for advisers owing a fiduciary duty to their clients, including an affirmative duty to act with due care, loyalty and good faith.
As you can see, it's clear as day that RIA's have a fiduciary duty to put their clients' best interest before their own profits.
The full text of the Investment Advisors Act of 1940 can be read at: http://www.sec.gov/about/laws/iaa40.pdf.
Laws and Regulations that Govern Financial Advisors
Series 6 and 7 licensed financial advisors employed by banks, insurance companies and brokerage firms are regulated under the Securities Exchange Act of 1934. This act created the Securities and Exchange Commission (SEC) and gave it the power to register, regulate, and oversee brokerage firms and their financial advisors as well as the nation's securities self regulatory organizations, such as The Financial Industry Regulatory Authority (FINRA).
The Financial Industry Regulatory Authority (FINRA) is the independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly.
FINRA Rule 2111 (suitability) requires, in part, that a broker-dealer or associated person (i.e., financial advisor) "have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile."
FINRA mentions in it's Rule 2111 FAQ that numerous cases explicitly state that "a broker's recommendations must be consistent with his customers' best interests." However, they also explain that "the requirement that a broker's recommendation must be consistent with the customer's best interests does not obligate a broker to recommend the least expensive security or investment strategy, as long as the recommendation is suitable and the broker is not placing his or her interests ahead of the customer's interests. Furthermore, FINRA goes on to explain that "the cost associated with a recommendation, however, ordinarily is only one of many important factors to consider when determining whether the subject security or investment strategy involving a security or securities is suitable."
Well that's as clear as mud. So what or who exactly is keeping financial advisors from recommending investments that profit them the most?
The full text of FINRA Rule 2111 can be read at: http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=9859.
The U.S. Department of Labor (DOL) recently stepped into the fiduciary vs. suitability debate by issuing it's Fiduciary Rule. This new rule is scheduled to be phased in over 9 months starting in April 2017 and will require all financial professionals (of course Registered Investment Advisors are already required to do so (see above) who give advice or recommend investments for retirement accounts (including IRA's) to act as fiduciaries.
While this rule is a step in the right direction, it falls far short of making financial advisors real fiduciaries to their clients as it fails to address the duties to act with Due Care and Good Faith.
A fact sheet of the DOL Fiduciary Rule can be read at: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/dol-final-rule-to-address-conflicts-of-interest