What’s the key difference between a broker, a financial advisor, and a Registered Investment Advisor? October 22, 2016
You need to understand who is on your side and who isn’t. And like most things in life, the easiest way to answer that question is to follow the money.
Brokers and financial advisors are both paid the same way. Their incomes are primarily from commissions.
Registered investment advisors are paid a flat management fee to help you. Registered investments advisors are held to what is known as a fiduciary standard. This means investment advisors have to act as a trustee for clients and put client interests ahead of their own.
Brokers and financial advisors are held to what is known as a suitability standard. This means that as long as an investment is “reasonable” for a client it doesn’t have to be in the client’s best interest. As a result the broker/financial advisor can pick whatever fund or product fits in the “reasonable” box. Guess what? They usually pick the one that pays them the most. Usually that’s also the one that costs you, the client, the most.
That’s why the wealthiest, most successful investors work with wealth managers that are investment advisors, not brokers and not “financial” advisors.
Click HERE to learn more about what the best investors do differently.
There is a world of difference between “advisors.” Here is how it works;
- Investment advisors don’t get paid to buy or sell stocks or funds in your account. Brokers and financial advisors do.
- Brokers and financial advisors collect commissions from fund companies for putting client dollars in their funds.
- Investment advisors do not get paid by fund companies.
- Brokers and financial advisors also get paid commission by their employers for putting investors dollars into in-house products such as their house branded mutual funds, or “special client only” products like Step Ups or Mortgage Backed Securities packages (think 2009 when the brand name banks and brokers got sued & indicted by the SEC for selling clients MBS products they already knew were going to lose a lot of money).
- Brokers and financial advisors often charge a management fee on top of everything else. So, they can get paid when you buy, when you sell, and when you don’t. It’s not a double dip, it’s a triple dip. And guess what else? Sometimes they even get paid what’s called a “trail” by a fund company or their employer as long as your money is in whatever product they recommended.
- Brokers and financial advisors are legally responsible to their employers. NOT to you, their client.
- Investment advisors are legally responsible to YOU, the client.
How does this work, exactly? Let’s pretend you want to buy a car. You stroll in to the local Hyundai dealership and explain the things you need in your car. You tell them you need it tow X pounds, seat up 4 kids in the back, it has to be big to protect you and your kids, and you want to be able to see over traffic when you are driving. You add a few more details and as it turns out, the best car to match what you need is a Toyota Sequoia.
But you are working with an Hyundai dealer. The person helping you knows they don’t have the vehicle that is the best match for you. But they don’t have any Sequoias to sell you.
If that person was a broker or financial advisor he/she would simply say “Let’s take a look at this car over here, I think it’s going to be a great fit for you” and then sell you the car that is a “reasonable” substitute. And he/she gets paid their commission.
If that person was a registered investment advisor, he/she is legally required to say “The vehicle that is the best match for you is a Toyota Sequoia. We don’t sell those here, but I can call the Toyota dealer and let him know you are coming.”
If the investment advisor got a referral fee for sending you to the Toyota dealer, he/she would also have to say “You should know that if you go to the Toyota dealer I recommend, I will be paid X% of the price you pay for the car. You don’t have to go to the dealer I suggest – you could buy your Sequoia at any car lot that sells Sequoias.
Here’s another dirty little industry secret – anyone can call themselves a “financial advisor” and in fact most brokers do. It’s to disguise the fact they are really financial product salespeople whose employment & income depend on selling you something and getting paid a commission on it. You don’t even need a license to call yourself a “financial advisor.”
But only registered investment advisors can say they are investment advisors. It requires a license and comes with specific responsibilities to clients.
An easy way to tell the difference is just find out what license they hold. Brokers and “financial” advisors hold Series 7, 6, 63, and 66. Investment Advisors hold the Series 65 license, and only the Series 65. If someone has both, there is a 99% chance they are using the other license to get paid on hidden fees.
Who would you want to work with? I’ve included an easy to understand graphic below to help illustrate the differences.
Click Here to get in touch –> we’ll check your portfolio for hidden fees and other problems. Maybe my firm and I can add value to your life and your investments.
Please share with one friend that can benefit from this information. Share buttons below for your convenience.
To smarter investing,
Vice President & Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.