Insurance Agents

Insurance agents are in the business of recommending and selling insurance and insurance-related investment products to their customers. In general, this may include fixed, variable and indexed annuities, whole life, term life and variable life policies. Independent agents may represent several insurance companies; captive agents represent only one insurance company. Compensation is typically on a commission basis.

Regulation and Oversight:

• State insurance regulators (In Michigan, it’s the Department of Insurance and Financial Services or DIFS)
• Financial Industry Regulatory Authority (FINRA) for products containing securities, e.g. variable annuities
• National Association of Insurance Commissioners (NAIC)

• Insurance agent
• Producer

Other Non-Legal Titles:

• Financial planner
• Financial advisor

Compensation:

• Typically commissions

Example Products:

• Fixed Annuities
• Variable Annuities
• Indexed Annuities
• Immediate Annuities
• Whole and Term Life
• Variable Life
• Long-Term Care Insurance
• Mutual Funds

Registered Representatives and Brokers

Brokers are legally referred to as registered representatives; meaning they are properly licensed and registered to buy and sell securities for their customers through the broker/dealer securities firm they represent. Brokers typically receive a commission for the buying and selling of securities. These transactions are handled on a non-discretionary basis, meaning the broker must receive authorization from their customer prior to buying or selling any security.

Standard of Care:

The standard of care for a registered representative is a know your customer and suitability standard. This requires that they gather comprehensive financial information about their customer, e.g. income, net worth, the purpose/investment objective of the account, investing time horizon, risk tolerance, investment experience, and the customer’s need for income or liquidity. Only from this information can he or she then recommend suitable investments for their customer.

Regulation and Oversight:

• Securities Act of 1934: Any person in the business of effecting transactions in securities for the account of others…
• State securities regulators (In Michigan, it’s the Michigan Department of Licensing and Regulatory Affairs LARA – Securities Division)
• The Financial Industry Regulatory Authority (FINRA)
• The Securities and Exchange Commission (esp. the Broker/Dealer)

• Registered Representative

Other Non-Legal Titles:

• Stockbroker
• Financial advisor or consultant
• Wealth manager

Standard of Care:

• Know your customer and suitability
• NYSE Rule 405 Know your customer
• FINRA Rule 2090 Know your customer
• FINRA Rule 2111 Suitability

Compensation:

• Typically commissions

Example Products:

• Stocks
• Bonds
• Options
• Initial Public Offerings (IPOs) and Syndicate
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Annuities and other insurance-related products (only if licensed)

Is a Registered Representative or broker right for you?

If the following characteristics reflect your investment needs, then a broker may be right for you:

• You’re mostly interested in picks and recommendations on an opportunistic basis from your broker.
• You like to be involved in the day-to-day management of the investments in your account and prefer to discuss each recommendation and authorize the transaction prior to execution.
• You are typically a buy and hold investor, and transactions are infrequent.
• Paying a fair commission when transactions occur is acceptable to you.

Registered Investment Advisers

Registered investment advisers (RIAs) provide ongoing advice as a matter of course to their clients. In general, RIAs utilize the same investment products and securities offered by the registered representative. But instead of buying and selling investments for a commission, investments are ‘managed’ for a fee.

A registered investment adviser can be a stand-alone independent firm or part of a large financial institution. Like registered representatives who buy and sell securities for their customers through the broker/dealer they represent, advisers who provide advice to their clients through their financial institution’s RIA, are referred to as investment adviser representatives (IARs). Most large full-service brokerage firms have a registered broker/dealer unit and a registered investment adviser unit associated with it. If properly licensed, a registered representative at a larger brokerage firm can also be an IAR under the firm’s RIA unit.

Standard of Care:

The Registered Investment Adviser has an affirmative duty to act solely in the interest of the client. This is referred to as a fiduciary standard of care. Acting as a fiduciary, all considerations, decisions and transactions must be made exclusively for the benefit of the client, and any conflicts of interest must be fully-disclosed up front. Unlike non-discretionary transactions that require registered representatives to have all transactions approved by the customer prior to execution, RIAs generally transact business on a discretionary basis, meaning they have discretion to buy and sell securities and to make other investment-related decisions on behalf of their clients without receiving prior approval.

Regulation and Oversight:

• Investment Advisers Act of 1940: Any person, who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities…
• Assets under $100 million: State securities regulator
• Assets over $100 million: Securities and Exchange Commission (SEC)

Legal Title:

• Registered Investment Adviser (RIA)
• Investment Adviser Representative (IAR)

Standard of Care:

Compensation:

• Asset-based fee i.e. an annual percentage based upon the value of the account
• Flat rate
• Hourly rate
• Retainer fee and monthly subscription

Example Products:

• Fee-based ‘platforms’ that typically utilize the securities offered by registered representatives.
• Separately managed accounts (SMAs) through investment management firms not affiliated with a brokerage firm or RIA.

Is an RIA or IAR right for you?

If the following characteristics reflect your investment needs, then a Registered Investment Adviser (RIA) or Investment Adviser Representative (IAR) may be right for you:

• You require or prefer ongoing and continuous advice
• You require or prefer the fiduciary standard of care rather than the lower suitability standard of care
• You require or prefer comprehensive reporting and performance measurement
• You require or prefer to have an adviser act on your behalf on investment-related decisions without pre-authorization of each transaction prior to its execution
• Require or prefer to pay a fee for services

Note: If you are a trustee or guardian, and you are responsible for the oversight and monitoring of investments for an individual, organization or other entity, you may be required to work with a registered investment adviser or adviser representative who is held to a fiduciary standard of care.

General Comparison

Registered Representative and Registered Investment Adviser: