If you’re like many people, financial planning and investment management are not things you want to spend a lot of time on, but you still want great outcomes. As a result, you’ve probably interacted with a broker, investment advisor or a dually-registered advisor (someone who is both a broker and investment advisor). It may have been a friend or someone you’ve never met. Sometimes, however, it can be difficult to tell whether the person you are dealing with is looking out for your best interests. When evaluating a prospective financial professional, it comes down to three things:
- What services do they provide?
- How are they compensated?
- What is the financial incentive for providing that service?
The term broker is being used less frequently nowadays. The technical term is actually registered representative. Brokers are regulated professionals who make trades on the behalf of their customers for a commission. Brokers work for a broker-dealer, which is a person or company in the business of buying and selling securities. You probably have heard of some of the largest broker-dealers: Edward Jones, UBS, Merrill Lynch, Morgan Stanley Smith Barney, and Wells Fargo. Broker-dealers are registered with the SEC (Securities and Exchange Commission) and members of the regulatory organization FINRA. Brokers are required to make “suitable” investment suggestions to their clients based on each client’s risk tolerance and overall financial situation.
The important point to note is that while the recommendations must be suitable, they do not necessarily need to be in the best interest of the client. This is where a lot of confusion comes in. People expect a broker to sell them an investment product that is in their best interest, when in reality it only needs to be suitable. The financial incentive for a broker is in the selling of investment products.
So here’s the breakdown:
- Brokers and Registered Representatives are the same thing.
- Brokers sell investment products for a commission.
- Brokers recommendations only have to be suitable, not necessarily in the best interest
Investment Advisors or Investment Advisor Representatives (IARs) are individuals that provide advice to clients regarding their investments. They receive compensation, usually a fee, for the advice they deliver. Investment Advisors can work for a Registered Investment Adviser (RIA), which is a company that is registered with the SEC or with a state’s security regulator. Investment advisors are also regulated by the SEC or a state’s security regulator, depending on the amount of money they manage. There are a few different ways investment advisors may charge a fee. The most common is an asset-based fee, which is a percentage of the money they manage for you. Other methods may be a fixed fee or an hourly fee. Investment advisors are required to act as a fiduciary to their clients. This means that they have a fundamental obligation to do what is in the best interest of the client. The financial incentive for the investment advisor is their fee. Many people like the idea that the investment advisor’s fee is based on the value of their account.
So here’s the breakdown:
- Investment advisors provide advice.
- They are compensated by a fee.
- Investment advisors act as a fiduciary, meaning they must act in the best interest of the client.
A dually-registered advisor is an individual that is both a broker and an investment advisor. They are also sometimes called hybrid advisors. They can act in either capacity and it’s important to know which capacity the individual is acting. One mistake clients make is that they are not clear on which capacity the individual is acting. This can lead to confusion about whether the recommendations or advice is in the client’s best interests.
Here is a chart that breaks down a broker, investment advisor and dually-registered advisor.
If you’re like most, you’ll want to work with a professional for your financial planning and investment management needs. That is a smart choice. In fact, Vanguard has done a study that shows working with an advisor can add 3% net alpha. It’s important, though, to not only know who you’re working with and the services they provide, but also how they are compensated and whether they’re looking out for your best interests. Vision Wealth Partners is an investment advisor, and proudly acts as fiduciary. If you have concerns about the advice you’re receiving, feel welcome to reach out via our confidential contact form, and we’ll help point you in the right direction.
Best of success,
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