The Crucial Difference Between Investment Brokers And Fee-Only Advisors
The common perception among the investing public is that all of the professionals who help clients manage their money are “financial advisors,” and all belong to one profession. This (mis)conception is dangerous and needs to change.
In reality, there are two distinct businesses: investment sales and financial advice. Knowing the difference can be crucial to your financial well-being when entrusting your finances to a professional.
Investment Salesmen vs. Advisors: How To Tell Them Apart
Those in the investment sales business carry many titles including broker, banker, insurance agent, and registered representative. As salesmen, they are trained and qualified to sell any number of investment products, from stocks and bonds, to mutual funds, exchange traded funds, deferred annuities, limited partnerships, non-traded RIETS, certificates of deposit, and life, disability, and long term care insurance.
They typically work within a traditional sales structure, representing the companies that manufacture, manage, and deal in financial products. They earn higher commission payouts on some products than others, and earn bonuses and other rewards for high sales figures.
What’s Wrong With Investment Sales?
I have no problem with those practices by themselves. If someone wants to sell investment products to willing (or naive) buyers, I have no objection. Brokers are very good at selling products; they must be very slick indeed to sell loaded mutual funds, horrendously expensive and illiquid life insurance, annuities, limited partnerships and non-traded REITS.
But I do have a problem with deceptive advertising. Brokers are not advisors. They are compensated through commissions for selling products, not for giving advice, and in my opinion, this conflict of interest disqualifies them from giving it. Brokers and other salespeople must stop confusing the investing public by calling themselves “financial advisors”, financial planners”, and “financial consultants”. At this point these titles are unregulated, and salespeople are taking advantage by posing as advisors.
It Comes Down To Compensation
So let’s be very clear regarding the difference: A broker represents an investment firm, not the client (thus the title “Registered Representative”). A broker is paid by that investment firm, not the client. A broker is qualified and paid to sell products, but is not qualified or paid to give advice. A broker is not a fiduciary and is not required to put the client’s interests first. After all, if your job is to represent an investment firm and sell as much as you can of their investments, how can you put the interests of your client first? Short answer: you can’t.
A fee-only advisor represents the client, not an investment firm. An advisor is paid by the client, not an investment firm. An advisor is qualified and paid to give advice, not to sell a product. An advisor is a fiduciary and as such is required to put their client’s interests first.
Knowing When To Steer Clear
Brokers are well aware of the fact that clients would rather be working with an advisor who puts client’s interests first, than with a broker whose business goal is maximum sales and commissions. Therefore they attempt to disguise the fact that they are really salespeople.
A few useful titles that may help break through the confusion:
“Registered Representative”: A salesperson who represents an investment firm and sells products on a commission basis.
“Registered Investment Advisor” (RIA): Not to be confused with the above, an RIA is an independent, fee-only advisory firm registered with either the SEC or one of the States. Be aware that RIAs can still operate a commission- based sales business if they are also registered with an investment firm such as a brokerage or insurance firm. To avoid those RIAs, select only those who advertise as “fee-only”.
“Securities offered through…”: A disclaimer from a salesperson that discloses the investment firm.
“Hybrid Advisor”: This person wears two different hats, the first as a broker, and the second as an advisor. This is especially confusing to investors, because at times this professional is selling an investment firm’s product for a commission, and at other times he is giving fee-based advice and representing the client.
“CFP® Practitioner”: This professional has passed a two-year financial planning course, and is held to a code of ethics. They can, however, still act as a broker or a salesperson.
“Financial Advisor,” “Financial Consultant,” “Financial Planner,” “Wealth Manager”: These unregulated titles tell us nothing regarding whether the professional is a broker or an advisor.
“NAPFA member”: An advisor who is a member of the National Association of Personal Financial Advisors, which restricts membership to fee-only advisors.
“Fee-Only advisor”: An advisor who represents the client, does not sell any products or earn commissions, but is qualified and paid to give objective advice, and puts the client’s interests first.
In summary, I propose this solution: If a broker wants to be an advisor who puts their clients’ best interests first, they should resign from their investment firm, give up their commissions, and join the ranks of fee-only Registered Investment Advisors. I did it long ago.