It would be overwhelming to research all the different financial advisory firms and investment advisors out there today.
Is there really a difference between firms? Who is a good advisor? Whom can I trust?
Given this uncertainty, most people just solicit a recommendations from friends or family. Then hire the recommended advisor without really examining alternatives or selecting the right person for their specific financial situation.
In this post, we try to provide clarity on the different types of financial firms offering financial advice. And discuss the qualifications of the advisors who work for these firms.
Types of Financial Firms Offering Advice
Brokerage Firms
Probably what most people picture when they think of a “stock broker”. Although this category contains firms of all sizes, the most well-known are national firms like Merrill Lynch/Bank of America, Morgan Stanley, J.P. Morgan, Goldman Sachs and UBS. These firms are sometimes called full-commission or full-service brokers.
They employ Registered Representatives (i.e., stock brokers) who sell investment products to clients and are paid commissions for completing transactions. The firms traditionally offer clients access to research on companies, a global reach, and capital market operations, including investment banking.
Independent Broker-Dealers (IBD)
Share many attributes with full-service brokerage firms, but the Registered Representatives don’t work directly for the firm. They are independent contractors who affiliate with the IBD. Representatives often market themselves as an independent firm (i.e., “Smith Capital Management”) with “securities offered” through their IBD affiliation.
Advisors generally maintain their own offices, as opposed to having all the brokers together in a corporate location. One of the largest IBDs is LPL Financial, although there are IBDs of all shapes and sizes.
Registered Investment Advisors (RIA)
A different animal in that they are paid for their services via disclosed fees instead of commissions; plus, they have a fiduciary duty to act in the client’s best interest. RIAs are registered with either the Securities and Exchange Commission (SEC) or with state regulators.
Most RIAs are independent firms and don’t take custody of client assets. Third-party custodians, such as Schwab/TD Ameritrade, Fidelity, and Pershing, hold client assets. Clients then grant the RIA authority to place trades in their accounts at the custodian.
Mutual Fund Companies
Often large mutual fund companies also provide investment advice. Although there are some very good mutual fund families out there, investors should be aware of the inherent bias that will come with any advice provided by a company trying to sell you their own proprietary mutual funds. Vanguard has moved aggressively into providing investment advice to clients.
Discount / Online Brokers
Many of these firms, which traditionally catered to the do-it-yourself investor, have started to provide investment advice. Depending on the level of advice desired, they may provide some limited advice for free, or provide full “private client” services similar to a brokerage firm or RIA. Generally, the strength of these firms is their web-site, low trading costs, and tools to help the do-it-yourself investor.
To confuse things even more, a firm may fit into more than one of the categories above. For example, a brokerage firm offering services on a commission basis through their Registered Representatives, can also be an RIA offering fee-based advice. Conversely, an advisor with an RIA firm may also be affiliated with an IBD, offering some services on a commission basis.
You will often see the term “fee-only” applied to pure RIA firms and “fee-based” for firms which offer some service for a fee and collect a commission for other transactions.
Types of Advisors
Registered Representatives (Series 7 licensed) – are employed by brokerage firms (full-service, IBD, discount, etc.) and are required to pass certain licensing requirements, including the Series 7 exam. As a broker, they are obligated to recommend only “suitable” investments to investors. Clients pay commissions either explicitly (e.g., $100/trade) or implicitly (e.g., markup on bonds, 12b-1 fees on mutual funds, etc.).
Investment Advisor Representatives (IAR) – are affiliated with an RIA firm. IARs have a fiduciary duty to always act in the client’s best interest. Clients directly pay RIAs a fee for their service; generally, a percentage of assets under management.
Important: an individual can be both a Registered Representative of a brokerage firm and an IAR. If you chose to work with a “dually-registered” advisor, clarify which hat they are wearing with you. And confirm if they are acting solely in your best interest or if they are just recommending a suitable investment.
Other Resources
A different take on categorizing financial advisors: What Is a Financial Advisor, and What Do They Do? (NerdWallet)
Discussion of recent changes to advisor regulations: A new rule could make it harder to figure out if your financial advisor is on your side (CNBC)
Original Wealth45 post: Investment Advice: Is There Really a Difference?
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