There is constant confusion in the Investment world around the different types of Wealth Managers that provide advice and investment services. The greatest confusion seems to be around the Financial Advisor and Registered Investment Adviser.
The first key difference is anyone holding themselves out as an Investment Adviser solely, must act as a fiduciary (client comes first) 100% of the time. This also assumes they never have or no longer carry any active brokers licenses like a series 6 or series 7. A Financial Advisor/Broker or anything else they call themselves does not necessarily have to abide by such standards. A Broker is likely to carry only a brokers license (series 6 or 7) and the typical Financial Advisor is what we call DUAL REGISTERED. We believe Dual Registered individuals are the most dangerous, as they will put it out there that they are Fiduciaries, but they are only Fiduciaries SOMETIMES.
Anytime a Financial Advisor/Broker etc., is selling you a commissioned product, they are never operating as a fiduciary no matter what they tell you the client. Commissions do not align well with fiduciary duty. Put yourself in the Financial Advisor’s shoes, if he has two products to sell to you, they are identical in every way except one has a higher commission ( better payout to the financial advisor), which investment do you suppose you would lean towards? Simply put, if your livelihood relies on that commission, wouldn’t you always provide the higher payout one? Since this is almost always the case, we have a hard time seeing how you can ever claim you are operating in the clients’ best interest when selling them any commissioned based product. The additional downside to the commissioned based product is the lack of incentive of the Financial Advisor to make any changes to deal with market situations, rather they would just sell another commissioned product in the event that a necessary need occurs.
Furthermore the Financial Advisor/Broker, is almost always tied to a firm which produces its own investment products. We will get into the inherent problems with those types of investment products in another post. They are typically required to push those products on clients. When you are driven to sell an internal product first, can you claim you are working in the clients’ best interest? Once again we would state no. The internal product pushed by the Financial Advisor is never better than those available in the open market. Its simple economics, if it was such a great investment product the Financial Advisor’s firm would want it available in the open market to sell as much as possible.
Now back to the Investment Adviser. The Investment Adviser must always put the client first, is a fiduciary from day one, and earns income from management fees. Management fees can differ fairly widely, but the general situation aligns with the clients’ best interests. We the Investment Advisers’ must look for the best possible investments with the lowest possible internal costs, because we make more when you make more. Our incentive is to invest you the client in nothing but the best. This mutually beneficial agreement is the only reasonable way to manage investments.
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