A recent article by a nationally known RIA points out that there is a difference between “advisor” and “adviser”.
The SEC act of 1940 authorizes an “adviser” to give financial advice for a fee placing the clients interest first (the fiduciary standard). However, some time later, the broker dealers (Wall Street) began calling their brokers “advisor”. (note the single letter of difference the “o” instead of “e”?) This single letter of difference is the basis of a great misunderstanding to the investing public. Looks and sounds the same, right? Nope! Advisers are held to placing the clients interest first and avoiding any conflict of interest. The advisor is required to determine suitability, is not required to disclose conflicts of interest, thus allowing the broker to sell higher commission, sale incentivized products, with client’s interest second or third behind, the brokers personal gain (self interest) and company profits.
A case in fact: A recent retiree and I, discussed his and his wife’s extensive research and interviews for where to invest his $350,000 401 k funds since his recent retirement. After some weeks and several interviews they chose a local BD rep, a nice young man with a good name brand. This financial advisor helped them to move the 401 k which required getting the forms from the employers retirement plan, setting up an IRA account and then investing the funds in an allocation of American Funds mutual funds A shares. He disclosed to the client that his commission was around $23,000. “A” share mutual funds have an off the top sales load of 3-5%. This retiree didn’t invest his $350,000 of hard earned savings! He invested $327,000 after paying the advisors commission.
This gentleman looked at me and asked if he did well? My reply was the company is a good company and certainly the advisor cares and did his best in his recommendations and allocation. However, had he and I met earlier, my 1% annual fee, charged quarterly (.0025 of account balance) would have allowed him to invest $350,000 at the start and pay no fee for the first three months, and give his money a chance to earn my fee and possibly more. The no-load funds, ETF’s and stocks typically used, would have likley had lower expenses as well, saving more of his hard earned money. Many advisor funds have an undisclosed charge (disclosed in the prospectus) paid to the broker/dealer known as a 12(b)1 fee. While small (.25% per year), it is still coming out of the investors pocket.
So in comparison, even if there were no returns, my fee of $3500 paid over the course of the year is still better for him whether he stayed with me or left. If the funds did well he would have a much higher account balance assuming that the performance of the funds with either account (RIA or B/D). With the advisor he chose, the commissions were paid up front, not only reducing the value of the account by the sales load, but also paying the broker in advance. The case is closed. If the retiree was unhappy with his situation, the commission was paid.
Do you have a Financial Advisor or a Financial Adviser and does it matter?