Financial Advisors, Hidden Fees, Incentives and Standards (The Forces Driving Investment Advice)

The Premise

The decision to hire a financial advisor is usually much easier than selecting the right one. The sheer number of types of advisors, titles, designations and terminology can confuse even the most financially literate. But these differences can profoundly impact how advisors manage your assets, which in turn, can have a huge impact on reaching important financial goals.

Types of Financial Advisors

Generally speaking, there are two types of financial advisors: Registered Investment Advisors (RIAs) and Brokers.

RIAs are fiduciaries, which means they’re legally required to put your interests ahead of their own. They’re compensation model is based on a fee, and they don’t receive compensation from anyone other than you the client. RIAs typically will advise you on a whole range of financial matters, not just the funds you should consider.

Brokers are regulated by the Financial Industry Regulatory Authority (FINRA) and adhere to a suitability standard which means they’re required to have “reasonable basis” for recommending assets to you. The broker may have a reasonable basis for recommending a particular fund for which his or her firm receives a commission for selling, while another fund may be just as good or better, but for which the commission is smaller or nonexistent.

Brokers receive commissions for buying and/or selling a particular security. This model has the ability to incent frequent trading.

Conflict of Interest

The SEC warns of conflict of interest among brokers and their clients, and requires that they include the following disclosure:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

Learn More

Download the free whitepaper, “Financial Advisors, Hidden Fees, Incentives and Standards for an in-depth analysis of the differences between Registered Investment Advisors and Brokers.”