MILESTONE VS WALL STREET
When choosing a financial advisory firm to invest your money with, a fiduciary relationship should be a critical component to your selection process – it is important to know and understand the difference between an RIA (Registered Investment Advisor) and a Stock Broker before making a selection.
What is a “fee-only” Registered Investment Advisor (RIA)?
- A RIA (i.e. Milestone Asset Management Group) is a firm that is licensed and regulated by the Securities and Exchange Commission (SEC) or your state if the firm has less than $100 million of assets under management. A “fee only” RIA receives compensation from the client directly and does not receive compensation from other sources. This is why a true RIA will not sell commission-based products (mutual funds, annuities, etc…)
What is a Stock Broker:
- A stock broker works for a Broker/Dealer (i.e. Edward Jones, Merrill Lynch, and Raymond James) that is licensed and regulated by the Financial Industry Regulatory Authority (FINRA). Broker/Dealers offer investment products that their affiliated stock brokers sell for profit and receive compensation in many forms (commissions, bonuses, fees, etc…). The professionals who work for the Broker/Dealers may be called registered representatives, stockbrokers, or any other title that helps them sell investment products. They can legally put the companies interest ahead of yours.
Dual Registration can make the legal situation very confusing. Today, a large number of financial advisors serve as both investment advisers and brokers. According to a FINRA study, 88% of investment adviser representatives are also registered as brokers. For example, you open several accounts with a financial advisor employed by one of the major brokerage firms. The advisor may sell you a “fee-based” account where he/she acts an investment adviser and concurrently sell you bonds or limited partnerships in another account where he/she gets a commission (which you may not even see) and functions as a broker. Which hat does he/she want to wear today and how much does he/she want to get paid? The biggest issue for clients of dual registrants is that ultimately the lower legal standard typically applies to the dual registrant wirehouse broker who can function as both an investment adviser and stockbroker.
How can you tell
The easiest way to determine if a financial representative is a RIA or a Stock Broker is by looking at the disclosures on the advisor’s website, marketing materials, and business cards. Brokers who sell products & dual registrants will have disclosures that look something this: Securities offered through XYZ Company, member FINRA/SIPC or Insurance and annuity products are offered by DDT, a licensed insurance agency and wholly owned subsidiary of XYZ.
- A RIA must operate under and adhere to a “fiduciary” standard of care. This standard requires RIA’s to act in a manner that is always in the client’s best interest. In fact, RIA’s are legally obligated to act in their clients’ best interests, even if that runs counter to the firm’s own interests. In addition, every RIA must disclose all forms of compensation and any conflicts of interest in writing. While other types of financial advisors may choose to adhere to similar standards or say that they do, RIA’s remain the only advisors that are legally obligated to do so.The Fiduciary Standard In June 2009, the Committee for the Fiduciary Standard was formed to define the “fiduciary standard.” This group of investment professionals and fiduciary experts advocated that all investment and financial advice be rendered as fiduciary advice and meet the requirements of five core fiduciary principles:
- Put client’s best interests first
- Act with prudence; that is, with the skill, care, diligence and good judgment of a professional
- Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
- Avoid conflicts of interest
- Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts
- Broker/Dealer sales reps are held to a much lower ethical standard that is called suitability. They are not required to put your financial interests first.
- Stock Brokers are typically compensated by charging commissions, fees, and bonuses from the sale of an investment product.
- A Registered Investment Advisor is compensated through fees based on their services. They may charge hourly or fixed fees for their planning advice and services. They may charge an asset-based (% of assets) for their investment advice and services.
- Beware of financial advisors that are known as “Hybrid Advisors”. They can charge fees like an RIA and receive compensation like a stock broker.
How can a financial advisor put their firm’s needs ahead of a client’s best interests?
This issue is currently the subject of considerable debates. There are legislative and regulatory efforts underway that would require all financial advisors to adhere to a fiduciary standard but, not surprisingly, it is being met with fierce resistance from Broker-Dealers. By allowing this legislation to go through, broker-dealers would stand to lose billions of dollars in profits that come from main street.