by Jack Waymire
Did you know there are two types of financial service companies? One is paid a commission to sell you investment products aka Broker/Dealer. The other is paid a fee for advice and ongoing financial services aka Registered Investment Advisor.
Registered Investment Advisor
A Registered Investment Advisor (RIA) is a firm that is licensed and regulated by the Securities and Exchange Commission (SEC) or your state if the firm has less than $100 million of assets under management. RIAs are permitted to provide investment advice and ongoing financial services for fees. The professionals who work for the RIAs are Investment Advisor Representatives (IARs).
Paladin Tip: RIAs may be owned by broker/dealers, banks, and insurance companies. Make sure you know who owns the RIA. Require them to disclose any potential conflicts of interest.
The other type of financial service firm is a Broker/Dealer (BD) that is licensed and regulated by the Financial Industry Regulatory Authority (FINRA). Broker/Dealers are allowed to sell investment products, including the trading of securities, for commissions. The professionals who work for the BDs may be called registered representatives, stock brokers, or any other title that helps them sell investment products.
Paladin Tip: Stock brokers sell products for commissions. They are not accountable for what they sell because they are paid at the time of the sale.
Based on industry regulations, RIAs and IARs are financial fiduciaries. This means they are held to the highest ethical standards in the financial services industry. They are required to put your financial interests ahead of their own.
Broker/Dealer sales reps are held to a much lower ethical standard that is called suitability. They are not required to put your financial interests first.
Paladin Tip: You should only consider fiduciaries (RIAs, IARs) when you select a financial advisor.
Compensation is a critical variable when you select financial advisors to help you accumulate and preserve assets for retirement.
A Registered Investment Advisor is compensated with three types of fees based on their services. They may charge hourly or fixed fees for their planning advice and services. They may charge an asset-based (% of assets) for their investment advice and services.
Broker/Dealer representatives are compensated with commissions when they sell investment products (mutual funds, hedge funds).
Paladin Tip: The appropriate way to pay for financial advice or services is with a fee. This is the same way you compensate other professionals (CPAs, attorneys) you depend on for specialized knowledge, advice, and services.
Stock brokers recommend mutual funds that invest your assets in the securities markets. That is the end of their paid services. Investment Advisors also recommend mutual funds, but that is the beginning of their paid services.
For example, an advisor provides a quarterly performance measurement service. The advisor may meet with you quarterly to review your results. Sales reps do not provide performance reports. They are limited to selling investment products.
Paladin Tip: You need ongoing services that are provided by RIAs and IARs. For example, a performance measurement report that provides the information you need to monitor your results.
Select an RIA or an IAR
You should limit your selection to a Registered Investment Advisor and the IARs that are registered with them. You should only select a financial fiduciary, who is compensated with a fee, to help you invest your assets.
Jack Waymire worked in the financial services industry for 28 years before he left to found the Paladin Registry (www.PaladinRegistry.com) in 2004. This investor education website was based on the Principles in Jack’s first book: “Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor.”
The Registry also has a free service that matches investors to advisors who meet Paladin’s minimum requirements for competence and trustworthiness.
Other posts from Jack Waymire
Paladin’s Registry of Financial Advisors is a Free Service for Investors
The world’s first financial advisor directory was the Yellow Pages®. All you had to do was thumb through...
How to Find the Best Financial Advisors
Your first step is to determine the criteria you will use to identify and select the best financial...
What is an Investment Performance Benchmark?
A Benchmark is a performance goal. Your advisor is paid to produce results that beat the performance of...
Jack, the problem becomes the B/Ds that are charging fees and collecting commissions. The broker who masquerades as an advisor/er leads unsuspecting clients to believe that they are going to be paying fees for AUM. They never even mention the word commission(s). One would have to know all the esoteric and proprietary terms for commission-based to determine if he/she was actually paying commissions. There’s the smoke and mirrors. There’s the esoteric gobbledygook. There’s the double talk. Consider this…I have determined that Morgan Stanley Smith Barney had at least 5 terms to describe commission-based accounts. These terms/’code’ words include but may not be limited to the following: non-managed, non-fee based, retail, brokerage, syndicate. They, however, *never* volunteer the word ‘commission.’ I suspect they have subrosa meetings where they tell their wolves cloaked in authentic-looking sheepskin to never use the word commission. I hypothesize that they tell them to use these other ‘code’ words. The problem is they are the only ones that know the ‘code’ words. I expect that we should not be surprised, as behavior rewarded is behavior repeated. If one is paid to deceive, then deceive he will do.