You’re probably thinking, well, of course they do! Right? I mean, there has to be some rule in
place that requires my advisor to only act in my best interest, doesn’t there? Well …
Investment Advisor Representatives (IARs) vs. Brokers
Financial professionals use a lot of different titles, and it can be really confusing (this is partially on purpose).
Generally speaking, Investment Advisor Representatives (IARs) work for independent Registered Investment Advisory firms (RIAs). Yeah, you read that right, it’s an acronym word scramble! IARs are regulated by the Investment Advisers Act of 1940 and are what has commonly become known as Fiduciaries. That means they act on behalf of another person and place their clients’ interests above their own.
Brokers = Financial Advisors = Financial Planners Etc. Etc.
Generally speaking, Brokers Et al., work for broker-dealer firms and are merely required to adhere to the suitability standard set by the Financial Industry Regulatory Authority (FINRA). The suitability standard states the broker to: ‘… have a reasonable basis to believe a recommended transaction or investment strategy … is suitable for the customer.’
Notice the difference, it’s subtle. A fiduciary has to ensure a recommendation is in the client’s best interest, a broker merely has to recommend a suitable product (of which there may be many that qualify).
Phew! It seems like it should be pretty easy to distinguish bet ween the two… not so fast!
The Two Hats
The vast majority of ‘independent’ advisory firms have representatives that are dual registered. Um, what?! A firm can be an RIA and also be affiliated with a broker-dealer and therefore has representatives that wear two hats. Sometimes, they wear their fiduciary hat and make recommendations that are in their client’s best interests but can then turn-around, change hats and recommend products that are merely suitable.
This dichotomy most often manifests itself like this: a representative charges their client a fee based on a percentage of the dollars that they manage (common for most advisors) but then turns around and also sells the client a product that pays them a commission.
Imagine going to a doctor with an infection and suspecting that you need an antibiotic. The doctor can choose between two different medications that would both solve the problem. One is less expensive and would rid you of the infection in 48 hours while the other is more expensive and would take three weeks. Choice number one is obvious, right? What if the company that makes the second antibiotic (that is still suitable for solving the problem) paid that doctor handsomely to use their product? You would hope the doctor would still make the right choice but it doesn’t change the fact that a conflict exists. Fortunately, that does not really happen in healthcare but it is all too common in the finance industry.
Prior to becoming a financial advisor, I worked as a nurse practitioner. I came into the financial industry as an outsider. The more I learned, the more shocked I became at how many conflicts of interest existed. Financial advisor compensation is often non-transparent and complicated. In some cases, advisors can be paid commissions for directing client’s investment dollars back into products the advisor’s firm manages. In other words, the advisor could get paid a fee by the client and the firm can get paid again based on the client’s dollars being invested in products the firm charges a fee to manage. This practice bothers me because it incentivizes advisors to place a client in a product primarily because it pays the most commission, not because it’s in the client’s best interest.
There are a (very) few truly independent firms out there that practice the fiduciary standard. Wait for it … yep, my firm, Oak Road Wealth Management is one of those firms! We are completely independent, not dually registered and proudly adhere to the fiduciary standard!
Ask your advisor if they will pledge to adhere to the fiduciary standard All The Time. If not, look for an independent firm (like us) that will.