Identify which type of money manager is driving the investment advice you receive, and whether it’s the best fit for you.
What type of money manager are you working with? If you are not sure, you are not alone. It can be tough to tell.
Money managers can be broken into two broad categories: Registered Investment Advisers (RIAs or advisers) and Brokers. Advisers and brokers operate under different standards of care, requirements known as “fiduciary” and “suitability.”
The application of these standards can create vastly different investor experiences, expectations, advice, and fees. While it’s a difference you may not appreciate unless you’ve experienced it, understanding the difference will give you the upper hand in selecting an adviser who will place his or her interests below your own.
By the numbers
Brokers represent the bulk of money managers, with over 600,000 registered with FINRA. By comparison, advisers are a rare breed. There were just 12,578 RIAs working in the U.S. as of July 2018 and registered with the SEC. Smaller advisers register under state law with state securities authorities and total about 17,500.
SEC-registered RIAs like those at Wambolt & Associates represent less than 2% of all money managers. Chances are you won’t find an SEC-registered RIA unless you are specifically looking for one.
Standard of care
Why you would be searching for an adviser comes down to the standard of care you want to pay for. Advisers are licensed fiduciaries and are legally obligated to act in the clients’ best interest.
Brokers are bound to a lesser standard of suitability, which requires the broker to sell investments they believe are suitable for their clients, not necessarily what is best for the client. Brokers are permitted under this standard to put their own or company interests ahead of their clients’ best interests. (For more, watch Butchers v Dietitians Brokers v Advisors Suitability v Fiduciary.)
The difference between advisers and brokers is often seen in compensation practices. RIAs either charge their clients a percentage of assets under management or a fixed or hourly fee.
Brokers receive most of their compensation through commissions based on the investment products they recommend and sell to consumers. This can lead to conflicts of interest: what’s best for the broker may drive higher costs and lower returns for the investor.
Investor confusion over who they are working with and alleged fee-steering practices is creating a demand for greater investor protections. The SEC proposed in April, 2018, raising the standard that applies when brokers provide investment advice.
Reform measures like these signal a growing understanding of the unintended consequences of varying standards for investment advice. They also reinforce what we’ve long known. The best investor advice:
● Explicitly places client interests above those of advisers and firms
● Is independent of compensation
● Is based on the “appropriateness” of a recommendation to a particular customer (see Where’s your financial compass pointed?)
How do you know who you are working with?
Titles alone may not tell you who you are working with. Brokers go by any number of titles, including financial or registered representative, and client or wealth adviser, creating a linguistic soup that feeds investor confusion.
The easiest way to know if your best interest is a top priority for your financial professional is to ask your money manager if they are regulated by the SEC or FINRA. Brokers are regulated by the FINRA and advisers by the SEC.
Then dig beyond the registration litmus test to make sure you are getting just what you want. Seek out conflict-free investment advice with an adviser that adheres to the fiduciary obligation of prioritizing client interests over their own. While brokers may be willing to adhere to the higher fiduciary standard, only advisers are legally bound to it.
Who’s handling your wealth?
Out of 100 advisers, only two are likely to be SEC-registered fiduciaries. We’re one of the 2%. At Wambolt, our status as a fiduciary is more than a role; it’s about doing what’s right for our clients. We deliver balanced professional advice that builds wealth and helps protect client holdings in our clients’ best interest.
Does your financial adviser have a conflict of interest? Find out now at BrokerCheck by FINRA.
If your adviser has a conflict of interest, let’s sit down for coffee. Schedule time with a Wambolt advisor.
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Wambolt & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Wambolt & Associates or performance returns of any Wambolt & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Wambolt & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
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