Information from the Washington State Department of Financial Institutions

Choosing An Investment Professional

There are many reasons you might want help with your investments. Perhaps you want to start a college fund for your child. Maybe you are concerned that you are not doing enough to save for retirement. Or maybe you simply feel the need to get your financial house in order.

While some people are comfortable handling their own investments, many are not. This is nothing to be embarrassed about. Investing can be confusing. The good news is there are thousands of people in the financial services industry who can help with financial and investment decisions.

Always Verify Licenses of Investment Professionals

Before you deal with any investment professional or brokerage firm, contact the Washington Department of Financial Institutions Securities Division at 360-902-8760 or 1-877-RING DFI (1-877-746-4334) to verify that the firm and the investment professional are duly licensed to do business in this state. You can also find out whether or not the firm and investment professional have any complaints against them or have been disciplined by any government regulatory agency.

What Types of Providers Offer Assistance with Investments?

Investment services providers fall into three categories:

Investment Advisers: The term investment adviser is a legal term that describes a broad range of people who are in the business of giving advice about securities (the term "securities" includes stocks, bonds, mutual funds, and annuities). They may use a variety of titles in addition to investment adviser, such as investment manager, investment counsel, asset manager, wealth manager, or portfolio manager. Investment advisers provide ongoing management of investments based on the client's objectives, typically with the client giving the adviser authority to make investment decisions without having to get prior approval from the client for each transaction (called discretionary authority).

Brokers: The terms broker and broker-dealer are legal terms that refer to people who are in the business of buying and selling securities (called trading) on behalf of customers. Individual salespeople employed by brokerage firms are often called stockbrokers and are officially referred to as registered representatives of the brokerage firm. But these individuals also use many other unofficial titles. These include financial consultant, financial adviser, and investment consultant. In recent years, brokerage firms have increasingly offered a broader range of investment planning services in addition to buying and selling securities.

Financial Planners: Unlike the terms investment adviser and broker, financial planner is not a legally defined term. However, it generally refers to providers who develop and may also implement comprehensive financial plans for customers based on their long-term goals. A comprehensive financial plan typically covers such topics as estate planning, tax planning, insurance needs, and debt management, in addition to more investment-oriented areas, such as retirement and college planning.

What Services Do You Want?

The search for the right investment services provider starts with the answer to a seemingly simple question - what services are you looking for? Investment services fall into three broad categories:

  1. Assistance with buying and selling securities
  2. Ongoing management of investments
  3. Financial planning

These services are related. Some firms offer all three under one roof, while others specialize in just one or two.

You may want an investment adviser to provide ongoing oversight and management of your portfolio of securities. You may simply want a broker to help you with the mechanics of buying and selling securities. Or you may want a financial planner to look at your entire financial picture - including insurance, taxes, estate planning, as well as investments - and come up with a long-term, comprehensive financial plan.

Defining what services you want will help you decide which investment services provider is right for you.

How Do You Want To Pay for Services?

Another factor that may affect your choice of investment services provider is how you prefer to pay for services. Your options fall into three basic categories:

Percentage of assets under management: Some investment services providers, including most investment advisers, charge a fee based on a percentage of the assets in the client's account. The percentages charged can vary significantly from provider to provider. Also, providers typically charge larger accounts based on lower percentage rates.

Commissions: Some providers, including many brokers, receive their compensation based on commissions clients pay each time they buy or sell a security. This can be an affordable option for those who expect to trade only rarely, but it may expose clients to potential conflicts of interest, such as creating an incentive to recommend frequent trades or particular investment products.

Fees: Some providers, including many financial planners, charge fees for their services which clients pay directly to the provider. They may be hourly fees or a flat fee or retainer fee for a particular service or range of services. They may also include a performance fee based on how well the client's account performs.

Providers may rely on only one compensation method, combine the different compensation methods within an account, or offer different compensation options to different clients.

Ultimately, you should determine which method of compensation offers you the lowest total costs and which method best aligns your interests with those of your investment service provider.

What are the Differences in Providers' Legal Obligations?

Investment services providers not only offer different types of services and charge for them differently, they also are subject to different federal and state regulatory requirements and have different legal obligations to their customers.

Important distinctions - including whether the provider has a clear obligation to act in your best interests or disclose conflicts of interest - depend on which legal category the provider falls into under our securities law.

Securities laws recognize two types of providers - investment advisers, who are in the business of giving advice about securities, and brokers, who are in the business of buying and selling securities on behalf of customers.

Investment advisers are subject to a fiduciary duty. That means they have to put your interests ahead of theirs at all times by providing advice and recommending investments that they view as being the best for you. Investment advisers also are required to provide up-front disclosures about their qualifications, what services they provide, how they are compensated, possible conflicts of interest, and whether they have any record of disciplinary actions against them. They are regulated directly by either the U.S. Securities and Exchange Commission (SEC) or by state securities regulators, depending on the amount of assets they have under management. You can find out whether a person or firm is registered or licensed as an investment adviser in Washington by calling DFI at 360-902-8760. For all other states, contact your state securities regulator using the contact information on the NASAA website: or by visiting:

Brokers are generally not considered to have a fiduciary duty to customers, although this standard may apply in certain limited circumstances. Instead, brokers are required 1) to know your financial situation well enough to understand your financial needs, and 2) to recommend investments that are suitable for you based on that knowledge. They are not required to provide up-front disclosure of the type provided by investment advisers. In addition to being regulated directly by the SEC and by state securities regulators, brokers are subject to regulation by industry self-regulatory organizations, including FINRA and the New York Stock Exchange. You can find out whether a person or firm is registered or licensed in Washington as a broker and check out their disciplinary record by calling 360-902-8760. For all other states, please contact your state securities regulator using the contact information on the NASAA website:

Financial planners are not separately regulated as planners. Instead, their regulation and the level of responsibility they owe customers depends on the type of services they provide. Planners who provide investment advice must be registered or licensed as investment advisers and are subject to a fiduciary duty. Those who trade securities must be registered or licensed representatives of brokers. Some financial planners perform other activities that do not involve securities and therefore are not regulated under laws governing either investment advisers or brokers.

The legal situation is further complicated by the fact that different standards can apply when investment providers serve as both investment advisers and brokers. For example, investment advisers who also buy and sell securities for customers must meet the requirements applicable to both investment advisers and brokers. The same is not true of brokers. They are permitted to offer investment advice in connection with their brokerage services without being regulated as investment advisers. As a result, the advice they offer is subject to the suitability standard that governs brokerage activities rather than the higher fiduciary duty that applies to investment advisers.