What do a broker, a dually registered investment advisor, and a real financial planner have in common?
They all call themselves financial advisors (or planners).
And no one knows the difference. The distinction is real, though. Within the advisory landscape, fiduciary advisors are on one side of the grand canyon, and the others are peering across with binoculars saying, "They've got a good thing going. Let's pretend to be them, but not actually be them. After all, we don't want to follow their fiduciary rules."
So what does this mean for you? It means you need to be careful who you take advice from. Let's discuss the distinctions between the three models and why it matters to you.
A broker is paid a fee or commission for selling investment products. There is nothing inherently wrong with this. We need people to provide investment products. Once they move into the advice realm, issues arise.
They do not have to recommend the best product for you! Meaning, they can line their pockets by selling expensive solutions that are (so-called) suitable.
Often, there are similar (if not identical) products for a fraction of the cost. They have no incentive to sell you that, though. And their financial incentives can be powerful.
Dually Registered Investment Advisor
So what is a dually registered investment advisor? They follow, what I call, the fiduciability standard (not a real thing). They are part-broker and part-advisor. And they can follow whatever standard fits their needs.
And if you're not cautious, you may not know which one you're dealing with.
There have been studies done to assess change blindness in humans. Two psychologists, Simon and Levin, designed a study to engage a pedestrian on the street in conversation, throw a distraction in, and then switch the conversation starter.
According to this study, almost 50% of people failed to recognize they were speaking with a new person after the distraction.
That is how I think of dually registered advisors.
He sits behind his desk and gives you "fiduciary" advice. Once the advisor is done with that, slight distraction and VOILA…a broker appears. But, you never noticed. And now he is following the suitability standard. Now he can sell you whatever financial product pays off the best for him.
So who should you be working with?
Real Financial Planners
This leads us to what Carl Richards calls, real financial advisors. These are advisors and planners who have their client's best interests at heart. And change lives because of it.
I'd like to think this is a product of being good people, but they are actually legally bound to that standard. Fee-only registered investment advisor's feet are held to the proverbial fire when it comes to being a fiduciary.
They cannot receive sales commissions. They are compensated on a flat fee basis or a percentage of assets under management. To be clear, you can still run into conflicts with this model. But, if the advisor doesn't disclose them and act in your best interest, he or she can be held legally liable.
So what is the main differentiator between these different types of financial advisors?
Suitability versus Fiduciary
It is the suitability standard versus the fiduciary standard.
If you ask someone who sells Ford trucks for a living what the best and most reliable vehicle is, you could guess what the answer would be. You don't need the F250 super badass edition, but he'll try to sell you on the perks. Is a Ford truck suitable for your situation? Sure. But are there comparable options that cost less? Or last longer? Probably.
And this is where a fiduciary is your best friend. A fee-only fiduciary is not compensated by selling a product or by a particular investment company. They receive a fee for their advice.
So, back to the truck analogy. Your real financial planner will survey the market and find the best truck for YOUR situation, not his pockets. He or she won't make a dime off the actual sale, though.
You pay a fee for advice, receive an impartial recommendation, and you, the client, end out with a much better result.
The confusion around this topic is abundant. I have conversations with well-educated, hard-working, smart people that don't have a clue they are being taken advantage of. I do not have a vendetta for the folks who work under these models. They play an essential part in the markets. I do want them to be honest about what they do, though, and call themselves what they are.
If you sell financial products, you are a financial salesperson. Which is fine. You should forthrightly call yourself what you are and be proud of it. But, if you want to be an advisor, meaning you get paid for your advice, you should be a fiduciary.
Like most advisors in the XY Planning Network, I am a big fan of the F-word.
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