When investing or seeking out personal finance advice, you must know the difference between fiduciary and broker. Here we outline fiduciary vs broker to help you make better decisions and (potentially) save you money.
Fiduciary vs Broker: The Differences You Must Know
Let me ask you an important question, do you know the difference between a true fiduciary or fiduciary standard vs a broker or brokerage firm? If you don’t know the answer or are unsure what the difference is then I encourage you to read on!
I personally have not gotten a clear answer from anyone that I speak to in personal conversations about investing. I get looked at like I’ve got 2 heads when I say fiduciary. A what?? Exactly!
If you currently have an advisor, broker, or anyone that manages your assets/investments or even someone that gives you advice from time to time. If you are thinking about choosing someone to manage your investments then this is a must read.
If you haven’t started managing your money and getting a free consultation from Personal Capital, you are simply missing out.
Before I go on any further I want to make it clear that brokers and advisors that are not or do not practice the Fiduciary Standard aren’t bad people or necessarily take part in illegal activity.
My goal for this post is to educate and not discriminate against brokers, but rather educate you the reader in making solid decisions for yourself.
I was once a client under the direct guidance of a traditional broker of a well-known firm but now I am currently a proud client of a true fiduciary.
Having experienced both sides of the fence this has given me a clear view of both. I’m Finance With Finesse, you can read more about my personal story here. As my story tells I was faced with large and unexpected financial decisions with no prior knowledge. My determination to get things right made me realize that a fiduciary was a top priority to get me on the right path.
Broker and Fiduciary Definitions
Let’s evaluate the definition of broker and fiduciary in order to understand the difference.
Definition of Broker
Broker Definition: A Broker is an individual or representative of a firm that purchases or executes investments for clients. 90% of all financial advisors in America are brokers, regardless of what their business card might say or you are told.
Here is how you find a financial planner for the millennial investor.
Brokers obligations are to only follow the suitability standard. They only have to believe that any advice or recommendations they make are “suitable” for their clients.
Brokers are paid commission tied to the investments they select for their clients. See any potential issues?
The main objective of a broker is to the firm they work for, not you the client, therefore, the broker does not have to place their interest below that of the client!
The suitability standard essentially says that it doesn’t matter who benefits more, the client or the advisor. As long as an investment is suitable or meets general direction of goals or objectives at the time it was placed for the client, the advisor is held free of liability.
Would you ever hire a lawyer, doctor, engineer that didn’t have your best interest? No! It is absurd that by law your broker (which 90% of advisors are) don’t truly have to act in your best interest. This could simply derail your plans for a happy retirement.
Registered Investment Advisor (Fiduciary) Definition
Registered Investment Advisor Definition: Also known as RIA’s. Again of the roughly 309,000 advisors in America, only ten percent make up registered investment advisors.
Just like doctors and lawyers they HAVE to act in clients best interest at all times. A registered advisor cannot sell you a product or profit off any sales of anything.
RIA must disclose any conflicts of interest with a client before doing business and explain how they get paid. There is nothing they can hide from you in any way. By law, this is a requirement and they are held accountable for it. Remember a broker is not!
Why would you not want an advisor that legally has to act in your best interest? Exactly! The astounding fact is that most Americans don’t! One of the biggest reasons is they just simply don’t know. Another reason for this is they are that rare, only one out of ten is a true RIA.
This brings up a big question you might be asking.
Why are there so few RIAs out there if we know this is the better way to invest? Well, its pretty obvious, brokers make a lot more money selling their products such as mutual funds with high fees, annuities that yield high fees and so many other discreet methods that also contain hidden fees. These fees over time will erode your gains substantially in the long run.
Personal Capital is actually an RIA in addition to their software, so if you have $100,000 of liquid cash to invest. They can invest on your behalf.
RIAs charge a flat fee for advice or a percentage of the client’s assets under management. A simple clean up front model. They’ll do the dirty work of reading and analyzing financial statements.
Fiduciary Standard Definition
Fiduciary Standard: This in contrast to the broker’s Suitability Standard. The Fiduciary Standard is that of the RIAs explained above.
In addition, Fiduciary Standard by definition is to receive conflict-free advice from individual professionals who have abandoned their big box firms and relinquished their broker status and have made the commitment to become registered. And of course, by law put their client’s needs above their own.
So we now see a clear difference between the 2, don’t we? Simple enough, I’ll get an RIA and be done with it. Not so fast.
Here’s the tricky part…
Dually Registered Advisors Defined
Dually Registered Advisors: This my fellow readers is where I hope to bring value to someone that thought they might have a handle on this subject and may even have a RIA.
Most RIAs are registered as both Fiduciary and a broker. Say what? I’m sure you see where this is going, don’t you?
Remember only ten percent of the roughly 309,000 advisors operate as RIAs right? That leaves us with 31,000 RIAs. Some 26,000 of these 31,000 operate as both.
So we are now left with only about 1.6% or 5,000 PURE Fiduciary’s in this country!
Before you panic or think this whole advisory thing is too complicated or too far fetched let me assure you, IT’s NOT once fully educated.
Dually registered advisors were at one point brokers that took the leap to go out on their own from a larger firm to give clients a larger range of investment options.
Once the broker makes the jump then the harsh reality is that these dually registered advisors sadly realize it’s hard to make the money as a true fiduciary.
The tricky part is they can legally switch hats right in front of you in split second, even though they may have good intentions for you, they are also looking out for their best interest.
It’s honestly not the advisor’s fault. The financial industry is structured to allow this. Congress makes sure doctors, lawyers and almost all professions act in the best interest of the public, adversely brokers do not have these strict guidelines. It’s actually very twisted!
How to tell the difference between fiduciary and broker
In order to find the right advisor then it may take a little shopping, but the process is not that difficult. If you ask specific questions you can get your answers quickly. You just need to make sure you know the correct questions to ask them.
When asking the right questions I guarantee you will get your current advisor’s attention and maybe, more importantly, you will catch them off guard.
My lack of knowledge caused me and my brother to take our advisor’s word for a long time, but after I fully understood what we needed I came back to him loaded my arsenal of questions and fired away. I had to make sure my mother’s assets were protected and figure out if he was was the right fit for us.
We used to talk on the phone for about 20-30 minutes but now our conversation shortened to only 5 minutes after I asked these questions. That’s all the time it took for me to realize that he was not the right broker for us. Even though he was a long time friend of my father’s and his broker for many years. He was a good man but once again I have to look out for my family’s best interest over his.
The decision was simple and I called the next day to dissolve my relationship with him as my mother’s advisor. He was somewhat shocked and commended me for my knowledge and of course offered me to stay as a client and make all of my own decisions.
Why hire an advisor then?
Well, what’s the point in having an advisor if you could do it on your own right?
I then hired a true pure fiduciary who has a very fast growing firm and they are awesome. I’m purposely not going to name any firms or give out any names in this post so I can do my own fiduciary duty and show you the reader that I’m not looking to make money on this post but provide you with a lot of insight from my experiences.
Now let’s dig into the questions that must be asked when looking for a true fiduciary. These questions are also very beneficial to ask your current advisor.
Questions to Ask in Fiduciary vs Broker
Here are several questions to ask in your evaluation on fiduciary vs broker:
- Where will my money be held? First question that you should ask. If the answer is with them, politely walk out. Bernie Madoff sound familiar? The fiduciary will all have your funds held by a third party custodian. Fidelity, Schwab and TD Ameritrade are all examples of places that keep money in a secure environment. You sign a limited power of Attorney that gives the advisor rights to manage money but cannot make withdrawals on the account.
- Are you registered Investment Advisor? If the answer is no then they are a broker. Once again politely decline. If the answer is yes then great, but still have to find out if they are dually registered or wear 2 hats. Simply ask if they are dually registered? If their business card says ABC broker-dealer then they are a broker.
- Do you or your party receive any third party compensation for recommending the product? The answer needs to be no! You have to make sure there are no kickbacks or compensation coming from the third party custodian of the money.
- Do you or your firm offer mutual funds or separately managed accounts? Very stern NO is the answer or they are for sure gonna get an extra commission with active trading or steering you into highly profitable products.
- What is your philosophy on investing? Do you believe you can beat the market? If they think they can beat the market by picking individual stocks or mutual funds then this means a losing game for you in the long run. Very few can do this. HERE IS A LOOK INTO WHY.
- What other financial services do you offer besides portfolio management and strategy? Due to broker status, most advisors have limited capability once past investing. You want a broker that can bring the tools of Tax efficiency, business advice, estate planning and any aspect of financial planning. I have utilized all of these just as much as investment advice for personal matters and have benefited greatly from all other services excluded from investing money. Managing money can get complex no matter how large your net worth. Having a team behind you makes the difference.
- To get down on their level ask them if they are registered with SEC or FINRA? The right answer is SEC, not both and not just FINRA
- Do you have the series 7 or 65 license? Right answer the 65 not both and not just the 7
Conclusion on Fiduciary vs Broker
I spent three months educating myself extensively on investing before making any decisions regarding my mothers estate. I wish I had stumbled on a blog post with all of this in one place with wording that I could understand and most importantly could connect and relate to someone that had been through this same scenario. IT WAS #1 INVESTMENT YOU CAN MAKE RIGHT NOW! BLOG POST WHERE I EXPLAIN ALL OF THIS.
I did not go over specific investments or types that a broker can nail you with or any that a True Fiduciary will suggest.
Read this post if you would like more information on this topic. 20 INVESTMENT TERMS YOU MUST KNOW WILL HELP.. In addition, consider these various financial ratios while investing.
When you have a “true fiduciary” they can and will educate you properly and always act in your best interest and you will have a teammate and partner that can assist and educate you!
Have I convinced you that a fiduciary is the only way?
If this post reaches just one person then it can make a substantial difference in the amount of time and money someone can gain. That’s why I started this and makes sharing all worthwhile.
I hope you find value in my post.
What type of broker do you have? Do you know fiduciary vs broker? Please let me know in the comments below. We’d love to hear from you.
Other Related Resources:
- Use these best robo-advisors to automate your passive income investments
- Our resources on how to invest money to ensure success
- How to use a 401(k) calculator to save on retirement fees
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This is a reasonable effort to explain the differences in advisor models. However, there are some points that fall short and leave out important information.
1. Your statement that most RIAs are dually registered is wrong. Most brokers are dually registered, not RIAs. There are certainly RIAs that are dually registered. The fact is that the brokerage industry formed RIAs to compete with the RIA model. You correctly point out the conflict in switching hats back and forth. True RIAs are not dually registered.
2. You suggest asking whether the advisor “offers” mutual funds or SMAs. A better question is do you offer proprietary funds. Ofer vs. recommend is the issue. I recommend mutual funds or ETFs to my clients. They are not proprietary. I don’t get paid anything by the funds.
3. Your advice on only working with someone registered with the SEC leaves out all state-registered RIAs. SEC registration is based on the size of the assets in the firm. SEC-registered firms must have $100 million or more in assets under management. Firms under that are state registered. I am state registered.
4. Many in the blogging community have an extreme bias against the assets under management compensation model. The SEC registration is, in essence, based on that model. How does that add up?
I’m a fiduciary advisor who came from the brokerage business. I was dually registered with my prior firms. Are there more conflicts of interest in dually registered firms? Yes. That doesn’t mean all advisors operate in their own interests. That’s the impression I get from your post.
There are many unethical RIAs. There are many good dually registered advisors who are committed to doing the right thing for their clients. I was one of them. I chose to start my own firm to remove some of those conflicts. I left a lot of revenue on the table to do that.
There is no way to eliminate conflicts of interest. RIAs who promote themselves as conflict-free are not being truthful. If you are getting paid for advice, you have a conflict. You also have a bias toward your point of view. There are multiple solutions to client problems. One fiduciary advisor may have a different solution to another. Both are acting in the best interest of their clients. There is no one size fits all solution.
As a former investment banker, you bring bias to the table as well. Nothing wrong with that. I think it’s important to disclose.
Most of the articles on the topic, including yours, leave out the nuances that are important to the decision. I’ve done that myself to market my firm. it isn’t right or accurate to do so. I don’t do it anymore.
There are good and bad advisors on both sides. I believe in the fiduciary model, which is why I left money behind to be one. That doesn’t mean it’s the best or only way to get good advice.
It’s a slippery slope.
Thanks for the comment. A lot to take in here. There will always be good and bad actors, no matter the industry. We see it in police force, lawyers, doctors, etc. These are all good points. Let me see how I can tailor it a bit better.
I am the one that wrote this guest post. Appreciate the comments, especially from a true fiduciary as yourself.
In writing this post my goal is to make the audience aware of the potential differences between fiduciary and a broker. In a lot of cases make people aware that there is what’s called a fiduciary and distinguish the two.
This post may seems like I am lashing out a bit, especially coming from a reader with your background but that’s not the intention. This is why I put the disclaimer in. But its exactly what I wish I would have known or been told before trying to deal with my late fathers estate. In the short time this has been posted it has already had positive impact. A large portion of readers of this post will not have the expertise or be a career long advisor such as yourself.
I agree there’s good and bad of both sides, I think this goes without saying. You can find ethical and unethical people in any profession.
At the end of the day it’s the client that makes the decision and as you say it’s a slippery slope. I personally am amazed how many people I talk to (some well off) that I know that have never heard of a fiduciary let alone know there’s a difference.
Fiduciary’s such as you and your firm and what you stand for is what brings Integrity to the investing world.
Thank you for the comment!
I like that you raise the issue. It’s a tough one to get right. I’ve written about it myself. There’s just a lot involved in the discussion that often gets left out. It’s usually not intentional. Nonetheless, it can be dangerous.
I believe your effort was sincere. And again, it’s an issue that needs to be discussed. I’ve lived on both sides and know how each works. It’s a hard but very rewarding business that can help a lot of people. That’s what I love about it.
Did you talk to advisors in both worlds? If not, that would be a good thing to do. As you can see, I’m passionate about this. I do appreciate the effort and agree with most of what you wrote.
Thanks for being gracious with my passion.
I have talked to advisors on both sides. From the likes of Peter Mallouk to brokers that push annuities and mutual funds or proprietary funds first. My about me page has my story on my blog. I had to educate myself on your profession and the workings of it and that of investing and personal finance in general . I did so to the point it is my passion although not my profession. My post was all for good intention. My first guest post also I’m a young blogger so it may of had a little passion in it from personal expierence. What if this post puts someone at your firm? You never know! ?. Appreciate the feedback?
I didn’t see any mention of this being a guest post. Usually, that’s indicated in the introduction. Maybe I missed it.
It was. You can check m y blog out at http://www.financewithfinesse.com if you want to see more from me.