Obligation

In this age of confusion about what is happening in the world, and the uncertainty of it, we thought it might be helpful to address one item that is certain; our legal obligation with you.

The topic we’re addressing is one of trust, a very sensitive and important subject.  Trust happens in many areas of one’s life, but we would argue being able to trust someone with your financial matters is one of the more significant.  Beyond the survey we recently sent to you (and which you may have responded but we have not looked yet…thank you if you did!), we think it is important to address the relationship that we are bound to with you.

As a matter of context, it will be helpful to lay out the two primary types of financial advisors, and their respective roles.  Further, we’ll explore some sub-types and nuances within each category so that you are smarter, as well as give you the ability to assist your children / friends to also be more aware and understand the crucial differences.  The financial services industry makes it unnecessarily hard to distinguish one from the other, though it is our personal bias they do that on purpose.

First, we have the Broker.  That person can call themselves a financial planner, financial advisor, registered representative, or investment consultant or a host of other terms so you really can’t tell by the title.  The primary key to determining what they are is how they are paid (commission), and their responsibility to you as an investor.  A broker only has a responsibility to make sure what you buy is ‘suitable’ for you.  It can be risky, concentrated in risk, and illiquid, but if you are young and working, it is ‘suitable’. Theoretically, if you would lose your job, an illiquid type investment would make it ‘unsuitable’ to sell you that product.  Brokers sell products and have no need to follow up with you to make sure the product is still right, though they continue to receive commissions on it (called 12(b)1 fees) 25-35 years down the road.

A broker can be associated with a “wire-house”, a more anachronistic type of term that meant one central location with all the branches being connected by private leased telephone or telegraph wires.  The industry really only has four of these left in the form of BofA’s Merrill Lynch, UBS, Wells Fargo and Morgan Stanley Smith Barney.  The industry has also spurred a flurry of independent broker dealer firms where the broker is not an employee, but an independent contract agent.  Still, these firms have a definite limit on their liability by the looser suitability standard.

The second category involves individuals who work for firms that are Registered Investment Advisors (RIA).  These firms are different primarily in that they have a ‘fiduciary duty’ to their clients.  Having this duty means the advisor must ALWAYS act in the best interest of their client.  This standard is much higher than suitable, and does require the advisor (who is called the RIA if they are the owner of the firm, like me, or they are an Independent Advisory Representative (IAR) if they are an employee of the firm) to maintain contact with the client to make sure the investments remain appropriate.  RIA firms do not have an inventory of product to sell, as brokers often do from their parent company, and offer investment advice for a fee (vs. the purchase or sale of a security).  These firms are regulated by the Securities and Exchange (SEC) or the State regulatory authority where investors are allowed / encouraged to bring complaints, and an investigation of each must be done.

Some nuances you might find useful;

  1. A Broker can advertise and use client testimonials saying how good they are.  An investment advisor, who as you now know has the higher standard and duty to the client, CANNOT use client testimonials.   They will be fined or kicked out of the industry.
  2. Investment advisors can be Fee-Only, or Fee-Based. This small wording change subject is very hot in the industry right now. Fee-only means you will not receive any other compensation, though a Fee-based advisor can, in fact, take advisory fees AND 12(b)1 fees.
  3. Annuities are not considered an investment product. They are an insurance product, and neither FINRA, the SEC or State investment authorities oversee them.  They are instead regulated by the State Insurance Commissioners.
  4. Brokers cannot, theoretically, call themselves an Investment Advisor.  However, some Investment Advisors can serve as Brokers as well.
  5. A Certified Financial Planner (CFP) is a separate rigorous national exam that some investment advisors take to make sure they are broad-based and competency certified. Alternatively, the investment advisor exam to legally practice is roughly 1/10th the length.