When it comes to your investments, do you "have a guy?" Sure, your investments have fallen—just look at the market. Whose investments have not fallen? And sure, "your guy" did you right during the tech boom. Your portfolio was up 30-40% that year.
But now in the grim light of a recession, after a long day at work when you had to cut your part-time staff, and your son, who just graduated from college, has moved back home because he has not found a job yet, you find yourself lying awake at night wondering, "Does 'my guy' have a moral and legal obligation to put my interests above all others?"
For many investors, this scenario has become all too real in the past 10 years. Everyone's "guy" is a financial planner, a financial adviser or a financial consultant. The distinction has been blurred by fancy titles or neatly packaged services and products. These days an investor needs to read the fine print of the contracts to know what type of "guy" they are working with.
In the financial world, it can be broken down into two distinct types: Broker-Dealers and Registered Investment Advisers.
Brokers—technically, a registered representative of a brokerage firm—are sales agents whose job is helping customers trade stocks and other securities. They are regulated by the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization that was created from the of the enforcement arm of the New York Stock Exchange and the National Association of Securities Dealers. FINRA protects investors by maintaining the fairness of the U.S. capital markets. In plain English, Brokers are governed by an agency that is dedicated to making sure legal products are sold legally.
Registered Investment Advisers are regulated by the Securities and Exchange Commission (SEC) whose mission is to protect investors by enforcing federal securities laws, and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. Under SEC rules, Registered Investment Advisers have a fiduciary duty to their clients. They must put the investors' interests above their own.
And therein lies the fundamental difference. An Adviser has a fiduciary responsibility to you, while a Broker's loyalty lies with his firm.
A Broker is not held to the same fiduciary standard as an investment adviser; therefore, they are only required to recommend "suitable" investments based on your investing objectives, risk tolerance, tax status and financial position. Costs and conflicts of interest are not disclosed because the Broker is not a fiduciary.
For example, you can call your Broker and say you want to play it relatively safe and invest your money in an index fund. However, your Broker is encouraged to sell his firm's products, which may not be your best buy. Brokers are not obligated to tell you that his firm's fees are considerably higher or that he receives a commission to sell his firm's funds. This is where the interests of the Broker-Dealer supersede those of the client. If you assume your Broker's suggestion is credible investment advice, you may risk achieving a fee-efficient, tax-efficient, sound portfolio.
On the other hand, an Adviser does not sell a product; they sell a service—financial advice coupled with the fiduciary responsibility to put your interests first. Advisory firms must recommend the best investment for the client. They are not obligated by a particular bank, brokerage firm or insurance company. Advisory firms can provide straightforward portfolio direction that is designed to be in the client's best interest. Advisers can only charge fees in three ways: a percentage of assets under management, on an annual basis, or on an hourly or "flat fee" basis. An adviser generally does not care if you choose Coke or Pepsi, as long as a consumer staple stock is appropriate for your portfolio.
While there is a fundamental difference in the pitch you will hear from a Broker versus an Adviser, one is not necessarily better than the other. Both serve a valid purpose to investors and both can have bad apples. An unscrupulous Broker can churn your portfolio racking up excessive fees while padding his own wallet with commissions. An Adviser can easily provide you poor advice based on an investment philosophy that is not suitable for your age, financial situation or risk tolerance.
Bottom Line
If you have the time, knowledge and dedication to be you own adviser, develop your own investment philosophy and do your own research, then a Broker makes a perfect agent to hold your money and complete your transactions. However, if you seek guidance for how to grow your wealth without incurring unnecessary fees or risk, we at The Henssler Financial Group suggest taking financial advice from or working with a Registered Investment Adviser. If you are going to trust someone with the stewardship of your wealth, we recommend that you choose someone who is held to a legal fiduciary obligation and high moral standard.
If you would like to speak with a financial adviser about your situation, you may call The Henssler Financial Group at 770-429-9166.
