The confusing world of “Financial Advisors” has two investment professionals and both seem to offer the same services financial advice in the securities (stock,bond, mutual fund, stock market) world. Both offer investments products, and personal one-on-one meetings to discuss your financial concerns and needs, and both offer solutions through products and services. Both often have professional designations after their name on their business cards, both have nice offices and many work for name brand institutions. Both have openly displayed educational credentials. Both are knowledgable of financial markets and economy.The client’s trust is paramount in this as with any business relationship.
So whats the difference and why should you work with one or the other or either? The two are: Registered Investment Advisor (RIA) and the Broker Dealer (BD) Registered Representative (RR). There is a significant, yet often undisclosed and thus unseen difference between the (RIA) and the RR of a Broker Dealer. The difference is the business model of the two that are as different as night and day. The RIA is fee based. The fee is disclosed up front just like getting an estimate on home repairs or hiring a lawyer. The RIA does not sell any investment products for a commission and his ultimate loyalty is to the client not a BD, insurance company or bank. Many fee-only RIA’s that will not sell any product that pays a commission. One such colleague had previously helped clients purchase Long Term Care insurance products because it was the in the clients best interest and was then paid a commission by the insurance company that issued the policy. This is well know business practice and we all know that this is how the insurance business works. This RIA decided to cancel all his commission income so that he could adhere to the ‘Fee-Only” business model. The insurance company didn’t understand how or why this licensed agent wished to not be paid! In some minds this is going a bit too far. The RIA standard of care is known as the Fiduciary Standard and is simply always placing the clients best interest first.
The RR is, by definition, an employee of the broker dealer and thus his ultimate loyalty is to the BD not the client.Of course the client is taken care of and of course, their interests are addressed. However, BD’s make money by selling products for commissions and this long established system has made many stock holders and RR’s very wealthy. The RR is held to a standard of “suitability and appropriate” investments. This nuance of advisory practice sounds reasonable. Who would buy something that is not suitable or appropriate? But the devil is in the details: this still allows for an inferior product to be sold especially if there are substantial commissions generated and/or other financial incentives such as production awards and trips etc. Commissions in the sales world are generally not disclosed. Sometimes a client is not concerned with the commissions they are paying, they like the RR and have a long-standing relationship and don’t care. This is fine as long as everyone is on the same page.
The “Fee-Only” model is to dedicated to remaining completely objective with product and strategy recommendations and not be seduced by big commission pay offs for “advising” high commission products rather than a lower commission product that might be in the clients best interest. However a simple character attribute known as “integrity” can and should take care of this issue more than holding to a principle to the extreme. It’s long held understanding that morality cannot be legislated. That is to say, if the Advisor has integrity and truly values the client’s best interest above personal gain,his integrity will bridge the gap of commission or fee or which product is best for the client. As long as the client knows and approves of the business, it’s all good. This extreme display of objectivity mentioned above, is due in response to the commission based “Financial Advisor” world of RR’s and insurance salesmen. Both of these worlds have expanded their sphere of knowledge and planning, both are capable of providing advice and service. Both have gained, in some cases, the opportunity and trust of their clients to advise with a sense of a Fiduciary standard, rather than the sales regulatory standard of “suitability and appropriate”. The weakness of this standard of care has numerous examples of the “Financial Advisor” “recommending” (selling) a product that has not only high commissions but inferior performance when compared to other “suitable and appropriate” solutions for the investment or financial need. The problem is with the integrity of the “advisor” more than the regulatory system.The insurance salesman and Broker Dealer RR, but are held to the latter standard,and the RIA is held to the former. Integrity and honesty are the ingredients that are required in either business model to maintain the clients best interest and serve the client.
So be sure to ask about how the advisor is paid. Go to my website and print the Fiduciary Oath and ask your advisor to sign off on it. if there is any objection, maybe you have a good saleman who gives advice.