1. Home
  2. /
  3. education
  4. /
  5. Who Can Legally Give...

Who Can Legally Give Investment Advice?

Nearly everyone has given investment or financial advice to someone at some point in their lives, whether it’s telling their friends about a hot new stock they’ve discovered, or a family member recommending buying real estate because the market is hot. 


Not all investment advice is the same, however. Some of it is highly regulated by the U.S. government, and some of it is completely unregulated. Entities such as the Motley Fool Stock Advisor picks are generally not regulated, and the same goes for casual online conversations. 


Who Is Regulated?


While the Securities and Exchange Commission (SEC) does not regulate what you discuss with your friends regarding stock tips, it does regulate what is said by those with a fiduciary duty. 


What Is a Fiduciary?


A fiduciary is a person who is legally allowed to safeguard, invest, and otherwise care for the assets and money of another person. The cornerstone of being a fiduciary is that a fiduciary must act in the perceived best interests of his or her client. Fiduciary duties can be found in many different roles that do not necessarily give financial advice:


  • Estate executors and those responsible for dividing a person’s assets according to their will after their death
  • Corporate boards
  • Lawyers
  • Insurance agents and companies 


What Professional Investment Advisors Are Fiduciaries?


There are two primary types of investment advisors that fall under the legal definition of fiduciary, and contrary to popular belief, they don’t just service high net-worth investments strategies–they typically deal with average families.


Certified Financial Planner (CFP)


It is a certified financial planner’s job to help people meet their financial goals. These could be related to investments, but are more frequently coupled with various aspects of a person’s finances. As they deal with everything from insurance and estate planning to retirement goals and ways to minimize tax liabilities, you can think of a CFP as a jack-of-all-trades financial planner. 


Registered Investment Advisor (RIA)


An RIA is similar to a CFP, but focuses on investments in general, typically in securities like stocks, bonds, and derivatives. RIA’s may simply provide advice, or they may manage a client’s investment portfolio for them. They could recommend a growth investing strategy, or may advise their clients to be conservative in times of market uncertainty. An RIA must act in their client’s best interests, as they have a fiduciary duty.


When Does Unregulated Advice Cross the Line?


Just because there is plenty of unregulated investment advice floating around doesn’t mean those who abuse the power of their voice can get away with financial murder, so to speak. 


There are many cases where financial advice is completely unethical, and in some cases, outright criminal. While the interpretations of each criminal case are up to a judge or jury, some common examples include the following:


Insider Trading


Having inside information about a company that the general public does not have access to, and using that information for personal gain or to help your friends gain financially, is a crime. Similarly, encouraging others to invest in a company that you have inside information about while knowing the company is headed for failure is also a crime. 


Conflicts of Interest


Pumping a stock without disclosing that you yourself own the stock is a serious violation of ethics and could put you in the middle of an investigation into stock manipulation. 


Pump and Dump


This typically combines the above two crimes into one hurricane of financial destruction that pumps a stock price to otherwise ludicrous levels, then allows the person that pumped the stock to dump their shares on the market. This nets them a huge profit while leaving everyone else holding the bag. 


Final Thoughts


Whenever you’re dealing with large sums of money—yours or someone else’s—you need to be transparent about what you stand to lose or gain, especially if you have a fiduciary duty to the people you’re advising.