In 2007, the Rand Corporation, of think tank fame, concluded that consumers do not know the difference between an RIA and a broker. However, the consumers in the study appeared to be under the impression that they could "trust" all advisors and that each advisor would be working in their best interests.

It goes without saying that people would like every relationship to be one in which they can trust the provider, be it an attorney, a mortgage provider or a contractor doing work on their home. However, trust as a legal right and trust as an emotion are different, and there are separate legal principles involved.

There are enormous legal differences when reviewing the operations and responsibilities of a broker-dealer and a RIA. Many of those differences are in the back-office operations, well out of the public eye, but one difference that has been tossed about publicly is that a broker operates under a suitability standard while an RIA operates under the fiduciary standard "in the best interest of the client."

OPEN TO INTERPRETATION

Operating in the "best interest of the client" is one of those phrases that may mean different things to different people. The legal profession and regulators will have one interpretation, and consumers may take it to mean something else entirely-and could well become even more disenchanted than they are now.

Despite its friendly tones, the phrase "best interest of the client" does not mean that the firm must care more about the client's wishes, return calls more promptly, provide statements that are clearer, charge fewer fees or make it easier for the client to access records. The standard also does not make it any easier or less costly for a client to terminate a relationship with a firm.

I will never forget a discussion I had with an RIA who was upset that a client was leaving his firm; he proudly declared that since he did not think it in the client's best interest, he would not assist the client in the transition. The advisor missed the point.

Moreover, the fiduciary standard does not necessarily mean a better return. If disclosure mentions that investments will be screened so that they are in the top three quartiles in terms of expenses and performance, and none of the investments provided any different compensation, then the standard is being observed. Clearly having a 74th-percentile portfolio on a consistent basis may lead to subpar returns, yet it may not violate the standard. That point is likely lost on the average consumer.

The fiduciary standard does not allow firms to execute trades from inventory without the client's granting specific authority on each trade. That means that if your firm has an inventory of bonds or stocks that you wish to buy for a client, it may need to execute that trade at another party, perhaps at a slightly worse price. With an extremely liquid investment this would not be problematic, but many bonds are not that liquid.

SEC MOVES

Recent legislation has given the SEC the authority to invoke a fiduciary standard for broker-dealers that is the same as that for RIAs. The agency has been asked to conduct a study and act appropriately. Chairwoman Mary Schapiro seems to favor an equal standard for people doing the same job.

Whether the SEC will impose uniformity or not remains to be seen, however. Further study, focusing on how the securities industry actually operates and discloses, coupled with a campaign to educate the public on differences, would be a better solution.

Morris Armstrong has owned a small RIA firm in Danbury, Conn., for 15 years. Before that, he was an institutional trader.