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WHAT ARE THE DIFFERENCES BETWEEN A BROKER/DEALER AND A REGISTERED INVESTMENT ADVISOR? Thumbnail

WHAT ARE THE DIFFERENCES BETWEEN A BROKER/DEALER AND A REGISTERED INVESTMENT ADVISOR?

Survey results indicate 76% of Americans do not know the difference between a broker/dealer and a Registered Investment Advisor. People in the financial business currently have the freedom to call themselves whatever they like: “financial advisor,” “financial planner,” or “financial consultant” are all popular. Unfortunately, none of these terms express exactly what the individual is paid to do.

A “broker/dealer representative” is a salesman of stocks, bonds and mutual funds. Many times they are also involved with the sale of insurance and annuity products (all for commissions). “Insurance agents” represent the interests of one or more insurance companies and only get paid when they sell a policy.

Neither the broker/dealer representative nor the insurance salesman gets paid to provide advice—hence, they are not truly “advisors.” These individuals only get paid when they sell a product– they are salesmen. As you might expect, salesmen only come around when they have a product to sell. Salesmen do not make a living servicing the products they have already sold.

Fee-only Registered Investment Advisors do not sell products. They work for their clients and are only compensated by their clients in exchange for professional advice. Thus, a fee-only planner’s compensation encourages objective advice and behavior that is always in the client’s best interest. These individuals are true “financial advisors.” Fee-only Registered Investment Advisors do not collect commissions, so they must continually ensure their clients satisfaction in order to make a profit. These advisors must constantly provide superior service to maintain their client’s business.

Most broker/dealer and insurance representatives are held to a “suitability standard,” meaning they must do what is suitable for their clients. By contrast, fee-only Registered Investment Advisors are held to a “fiduciary standard,” meaning they must do what is in the client’s best interest. To illustrate the difference, suppose the S&P 500 index is a suitable investment for a client, but there are two funds the advisor can choose from. One fund has an expense ratio of .75% and pays a .6% commission to the salesperson. The other fund has a .15% expense ratio, and pays no commission to the advisor. Both funds are “suitable” for the client, so a broker/dealer is allowed to recommend the more expensive fund. However, a fiduciary is obligated to recommend the fund with the lower expense ratio that does not pay a commission. Big difference!

- Lon Jefferies