In the complex world of financial services it is often believed that every advisor is the same. If you believe this, then you should learn more about the difference having a Registered Investment Advisor can make. There are many types of advisors that exist in financial services. The truth is that they are not all the same and when it comes to choosing an advisor, a little research will help you understand who may better serve you.
So, there are at least three different types of advisors with some overlap as each can have multiple licenses and therefore have multiple roles. The three types are:
||Investment Advisor Representative of a Registered Investment Advisor
||Registered Representative (Broker) of a Brokerage Firm
I am going to focus the discussion on the difference between an Investment Advisor Representative and a Broker. The key differences that define the relationship are important as you search for and choose an advisor to help guide you.
Fiduciary vs Suitability
There is a significant difference between the level of responsibility that is applied by law to the two different roles. For an Investment Advisor Representative, there is a requirement based on the Investment Advisers Act of 1940 to act as a fiduciary and put the clients interests before their own. This simply means that the client is the most important consideration for any recommendation provided and all conflicts of interest must be disclosed to the client.
As a Broker or Registered Representative for a broker-dealer, there is only a standard of suitability. What does suitability mean? The standard of suitability only dictates that the investment sold to the client is appropriate given the client’s current financial situation. So, the broker is able to sell/offer the investment that may pay them the highest commission because their interests can be placed above the client’s best interest.
Advice not Sales
For Investment Advisor Representatives, the goal of any work done for a client is to provide advice and guidance with a foundation in planning. The advice is based on the needs of the client. The driving goal is to provide strong guidance that helps the client achieve their goals. Once a recommendation is formulated, an Investment Advisor Representative working solely for a Registered Investment Advisor helps with the implementation but is not compensated by any investments that may be used in the process. In many instances, there may be a need for insurance to be purchased. At Courage Miller Partners, we work with our clients and an insurance professional to then implement the insurance need. As a fee-only Registered Investment Advisor, we would not benefit in any way from the purchase of the insurance product. As fiduciary Investment Advisor Representatives, we share full details regarding how we earn our fees and fully disclose any conflicts of interest. There are no hidden compensation agreements or commissions that would jeopardize our responsibility to our client.
Can’t tell by the title
In today’s financial services environment, you cannot rely simply on a title to help guide you in your decision process. There are titles used from Wealth Manager, Financial Advisor, Investment Advisor and Financial Planner that are used in the industy, but these titles do not disclose any aspect of their compensation arrangement or responsibility to you as a client.
How can you tell the difference?
If you truly want to know, simply ask the financial professional if they are ever compensated by commissions for the sale of financial products and investments. The answer to that question will immediately let you know if they are truly an Investment Advisor Representative or not. If they answer that they may receive commissions, then you know that when you are presented with a recommendation there is potentially some incentive provided to them for selling the product. Now you must ask if it is truly the best product or the highest commission for the professional.
The Grey Area in between
With all situations there always remains a grey area that must be carefully navigated. A very traditional practice is for many financial professionals to be duely registered as both an Investment Advisor Representative and a Registered Representative (Broker). When a financial professional is licensed as both, they may provide financial planning and guidance for a fee or free, but at the time of implementation of the advice they implement the plans as a Registered Representative and receive the commission compensation from the products used to implement the plan.
Fee based vs Fee only
In many instances, professionals will refer to their compensation structure and the subtleties make a difference. A fee based advisor is an advisor that may charge traditional asset based fee for portfolio guidance, but receives commission compensation from product recommendations and sales. A fee only advisor is only compensated from a traditional asset based fee for portfolio management, hourly fees or flat fees. You will always know the full extent of the compensation for a fee only advisor. You will not have to ask yourself if the recommendation is in your best interest because the advisor has no incentive to recommend the product unless it is beneficial to your goals. As a result, we highly recommend seeking out a fee only advisor as you look for guidance and planning.
We recommend using the SEC Investment Advisor Search and FINRA Broker Check to review the information of potential advisors and their Registered Investment Advisor and/or Broker/Dealer. While the information does not indicate competency, it will provide information regarding complaints the advisor has received. You are also provided the company that has them registered as an employee.
Hopefully, as you search for a financial advisor, you can use this as a guide as you interview potential advisors to help you through your financial decisions.