The Truth About Financial Advisors.

Is your financial advisor really an advisor or actually a broker? What’s the difference? A true financial advisor has a fiduciary duty to their clients that requires that they put their clients’ interests ahead of their own.

Dealer-brokers are required only to insure that their recommendations are “suitable” for their clients. So you’re going to get steered into products/investments that maybe OK (although not necessarily the best) for you, but are also beneficial to your advisor’s firm.

One way to know which kind of wealth manager you are working with is to look at how they charge for their services. Most fiduciaries charge on a “fee-only” basis. They make no money or commissions from the investments or products they recommend. By contrast broker-dealers are “fee-based”, which means these advisors while operating with conflicts of interest are charging you both a fee AND often earning a commission on the products/investments they recommend.

If your wealth advisors works with a large big brand financial institution (i.e. Merrill Lynch, Goldman Sachs, etc) they are most certainly a broker-dealer and not a fiduciary — and to say it again, not required to put your interest ahead of theirs. This is not to say that there are not fine men and women advisors at these companies because there are — including many of my friends! It’s just important for investors to understand how these firms work.

Unfortunately for investors any confusion around the various types of advisors and their important differences now looks to get worse. In June the SEC passed a set of regulations, together dubbed Regulation Best Interest, meant to improve quality and transparency in the financial-advice business. But does it really help? In practice, as the Wall Street Journal points out, the new regulations almost seem to create more confusion. This appears as a win for the big bank advisers who now with a few disclosures can claim that their recommendations are not only “suitable” for their clients but also in their “best interest”. Interestingly enough, according to a July 17 story on NPR Marketplace, big banks are increasingly focused on growing fees from their wealth management businesses as profits from loans and trading shrink.

Another concern I have found with big bank broker-dealer advisors is that they are limited in the types of investments that they can actually recommend to their clients. Primarily these advisors can only recommend public stocks and bonds (in all their various products/forms). Advisors at the large brokerage firms mostly can not recommend alternative investments like private real estate offerings. Why? First they don’t have access to it. With the exception of public REITs, which is entirely different, real estate is not on their platform. Or as David Blain, CEO-founder of BlueSky Wealth Advisors puts it, “Most advisors are paid on a percentage of money they manage, and since these firms don’t manage real estate they don’t have much to say about it.” Further private real estate offerings are not covered by these brokers licenses or by their firms insurance. Hence their compliance departments won’t let them talk about it. The reality is most of these advisors don’t know anything about real estate anyway. Either way, if you work with a big brokerage firm, you’re going to need to find real estate investing on your own (which is what happened with me).

The bottomline, in my experience investors would be much better served working with a financial advisor who is a fee-only fiduciary. If you’d like to hear more about my thoughts on this subject I’m happy to discuss.

A couple other posts that I think you will like:

“My Next Google: A perspective from employee 75

“Is Real Estate is Still a Good Investments”

Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.

Written by

Investor, Partner, Advisor. First Google Advertising Exec (2000–07), ex-Chicagoan. Now at OpenPath Investments & FullCycle Climate Partners

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