One of the keys in having a successful experience with an investment firm is to understand your relationship with your broker or financial advisor. You should know what their role is, what they will (and won’t) do for you, and how they get paid. Here we discuss the four main types of advisors.
Full Service Stockbrokers
Full service stockbrokers represent the standard traditional model for investing. Upon opening an account at a full-service brokerage firm, you will work one-on-one with a personal broker or his team. Often called financial consultants or investment consultants, these brokers will offer assistance in making your investment decisions, structuring your portfolio, and may also provide additional services such as banking or loans. Full service stockbrokers typically are available to provide research or answer questions about your account. In exchange for this personal service and guidance, full service stockbrokers typically charge a relatively high commission or fee. They also may charge management fees and other account fees. For many people – especially for modest investors – these additional services are worth the extra cost. It is always important to have a clear idea of what you will be charged and for what.
One important thing to understand about brokers is that they are generally not considered to have a fiduciary duty to customers (although this standard may apply in certain limited circumstances). A broker is only required to know your financial situation well enough to understand your financial needs, and to recommend investments that are suitable for you based on that knowledge. Nothing more – nothing less. Because most full service stockbrokers are paid on commission, this may increase their interest in the frequency of trading in the customer’s account. This type of monetary interest can certainly come into play when the broker is making a recommendation. In the end, a good broker is probably worth it – but a poor one is nothing but a glorified salesman.
Discount brokers carry out buy and sell orders at a reduced commission (as compared to a full-service or traditional broker). A flat fee is typically charged for executing an order. Discount brokers generally provide no personalized investment advice. This approach is geared toward the do-it-yourself investor who does his or her own research. The customer places the order and the broker will simply execute it. Often this is done online or by calling a toll free number and speaking to whichever broker answers the phone. You will not develop a relationship with one individual. In exchange for giving up personal contact with a regular broker, customers are charged a significantly lower commission. Some discount brokers offer limited advice or research reports to their customers for a fee.
Investment advisors are in the business of giving advice about securities. They may deal with stocks, bonds, mutual funds, and annuities. They may use a variety of titles in addition to investment advisor (or adviser), such as investment manager, investment counsel, asset manager, wealth manager, or portfolio manager. Investment advisors provide ongoing management of investments based on the client’s objectives, typically with discretionary authority from the client. This allows the advisor to make investment decisions without having to get prior approval from the client for each transaction.
Virtually all investment advisors are registered and thus regulated directly by the United States Securities and Exchange Commission (SEC) or by state securities regulators. (Great caution should be used before hiring any unregistered advisor). Investment advisors are subject to a fiduciary duty, meaning they have to put your interests ahead of theirs at all times by providing advice and recommending investments that they view as being the best for you. This is one major advantage in hiring an investment advisor over a broker. Investment advisors also are required to provide up-front disclosures about their qualifications, what services they provide, how they are compensated, possible conflicts of interest, and whether they have any record of disciplinary actions against them.
Financial planners as a rule look at every aspect of your financial life—including saving, investments, insurance, taxes, retirement, and estate planning. They help you develop a detailed strategy or financial plan for meeting all your financial goals. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered. They may work for an hourly fee, a flat fee, on commissions, or a combination of the three.
Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren’t securities. Most financial planners will also be registered investment advisors. Many will hold advanced certifications such as “CFP” which designates a certified financial planner. Some financial planners also serve as brokers. One difference is that a financial planner usually will be subjected to the higher fiduciary standard of care as opposed to the lower standard of care required by a broker.
If the idea of having a person working for your interests and not his firm’s appeals to you, consider a financial planner or registered investment advisor. Good luck and make the decision right for you!