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Indiana Securities Division

Securities Division > Indiana Investment Watch > What's What in the Financial Services Industry What's What in the Financial Services Industry

Welcome to your guide to the financial services industry. Here you will find detailed information about types of firms, individual representatives and products, including a definition, a list of exams required for any licenses and the regulatory body that oversees activities.

Complex titles like broker-dealer, solicitor and hedge fund manager and designations like CFP, CPA and IAR may seem like alphabet soup. Before working with any financial services professional, it's important to understand what their title means, what qualifications and designations they have and who is responsible for regulating their activities. This information can go a long way in protecting your hard-earned savings and may even prevent you from falling victim to fraud.

Standard of Care: Suitability Requirement vs. Fiduciary Duty

In the financial services industry, there are two different standards of care for financial services professionals: suitability requirement and fiduciary duty. With a suitability requirement, financial services professionals must offer products that are appropriate to their client's needs, goals, risk tolerance and more. However, they are not obligated to act within the best interest of their client, meaning they can push investments that secure a higher commission for them but may not provide the highest returns for the client. With a fiduciary duty, financial services professionals must offer products that are in the best interest of the client, meaning they put the needs of the client before the needs of their employer. Fiduciary duty is the highest standard of care in the industry. This distinction is noted for each type of financial services professional listed below.

Example: Two products exist that are both suitable to a client's needs. Product A gives the client a better return on their investment but Product B gives the financial services professional a higher commission. Acting under the suitability requirement, the financial services professional might offer Product B. However, under fiduciary duty, the financial services professional must offer Product A.

 Firms  Individuals Products 
Broker-Dealer Firm  Broker-Dealer Agent  Variable Annuity
 Investment Adviser Firm Investment Adviser Representative Equity-Indexed Annuity 
Insurance Firm  Insurance Agent  Commodity 
  Financial Planner  Promissory Note 
  Hedge Fund Manager   
  Solicitor   

Compensation: Fee-based vs. Commission

Another factor to consider is how financial services professionals are compensated. It varies across the industry, but in general compensation can be broken down into two categories: fee-based and commission-based. Fee-based professionals are charged an hourly rate or a fee that is based on the performance of the funds they are managing whereas commission-based professionals earn a commission each time they buy or a sell a product for their clients.

Both types of compensation have potential benefits and possible drawbacks depending on your individual needs. For example, commission-based professionals can be useful if you don’t plan on having many transactions. However, investors should be wary that they are not pushed into products simply for the higher commission.

Before working with a financial services professional, be sure to ask about compensation and other associated fees. Also, keep a close eye on your monthly statements and watch for excessive or unauthorized trading.

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