Is the Financial Advice You're Getting a Trick or Treat?
Don't get tricked by Wall Street; know the difference between a broker and a financial adviser.

Over the last decade, investors have grown savvier, more sophisticated and more self-aware. Increasingly, they are rejecting the product-centric, obscure, sales-focused approach of brokerage firms in favor of the client-centric and transparent advice model of independent financial advisers.
Not willing to sit by and watch trillions of dollars of assets walk out their doors, the brokerage houses are masking themselves as "wealth management" firms, and stockbrokers have dressed up as "financial advisers" and "wealth managers." As a result, investors are once again left to discern whether the advice they're getting are tricks or treats and which professionals truly have their best interests in mind.
The costuming of the financial industry doesn't change the systemic problem of an investment advisory model that has always been and continues to be at cross-purposes with client interests. Even the well-intentioned stockbroker, who vehemently tries to put his clients' interests first, is beholden first to the firm because it is the source of his compensation. Commission payouts, as dictated by the firm, increase or decrease based on the amount of production (product sales) generated and the type of products sold. Conflict and bias are essentially baked into the compensation arrangement.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Contrast that with independent Registered Investment Advisers (RIAs), who by law are required to act as fiduciaries and always put their clients' interests first. In a fee-only advisory model, the RIA answers only to the client because he is compensated directly by the client. There are no commissions, no payout levels, no product incentives, no revenue-sharing or any other form of compensation. That allows the adviser to maintain an unbiased and conflict-free position in the relationship. There is no incentive for the adviser to put his interests before his clients' interests. The fee is sometimes based on a percent of assets under management, typically around 1%, or it can be a straight flat fee much like a retainer.
How to See the Difference
Understanding the difference between a true financial adviser and a broker masked as a financial adviser is important, but investors still must be able to penetrate the obfuscation of slick Wall Street marketing to see the difference. Armed with this understanding of the differences and a few simple but direct questions, investors can quickly uncover who is behind the mask.
- To determine whose interests come first, ask: Do you operate exclusively under a fiduciary standard of care? Can I get that in writing?
- To uncover potential conflicts of interest: Are you able and willing to access the entire market for the lowest cost investment options, or are you limited to a fixed range of options?
- To determine the level of transparency under which they operate: How exactly are you compensated, and how is that determined and disclosed? Who besides yourself receives compensation from my investment purchase?
- To determine if you will receive truly authentic advice: Under what principles is your investment advice formulated? Is it grounded in sound theory or your own frame of reference?
A broker will not be able to pass such scrutiny for these reasons:
- Brokers are not required to operate under the fiduciary standard of care, nor can they based on the way they are compensated.
- Most brokers only have access to the range of investment products offered through their firm, which aren't necessarily the lowest cost options available on the market.
- When asked about compensation, brokers are required to disclose certain aspects of how they are compensated; however, they don't have to disclose who else receives compensation or any back-end arrangements with third parties or production incentives.
- Finally, brokers may follow a prescribed investment process, but they are not required to ensure that the investment recommendations are in the best interests of their clients; they are only required to determine their suitability based on their knowledge of the client.
Clients should expect the level of professionalism and the same clarity of duties and obligations in their financial advisers as they do in their doctors and lawyers. When seeking financial advice, they should know, unequivocally, that it is authentic and objective. Wall Street firms have succeeded in blurring the lines between authentic financial advice and incentive-based advice, leaving many investors vulnerable to the clash of interests—their own and those of the firm. While it should be the responsibility of any financial intermediary to ensure their clients are clear on the nature of their advisory relationship, clients need to be better informed as to the differences.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
Craig Slayen, a new partner with Cypress Partners, contributed to this article.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
-
Four Surprising Signs You’ll Never Retire (and How to Fix Them)
Gearing up to retire? If any of these four signs ring true, you may want to make some changes before you do.
-
Stocks Rise After Trump-Powell Fed Tour: Stock Market Today
Nvidia hit a new all-time high intraday, but another renowned semiconductor name and some less iconic stocks were bigger movers Friday.
-
How Divorced Retirees Can Maximize Their Social Security Benefits: A Case Study
Susan discovered several years after she filed for Social Security that she is eligible to receive benefits based on her ex-spouse's earnings record. This case study explains how her new benefits are calculated and what her steps are to claim some of the money she missed.
-
From Piggy Banks to Portfolios: A Financial Planner's Guide to Talking to Your Kids About Money at Every Age
From toddlers to young adults, all kids can benefit from open conversations with their parents about spending and saving. Here's what to talk about — and when.
-
I'm an Investment Pro: Here's How Alternatives Could Inject Stability and Growth Into Your Portfolio
Alternative investments can often avoid the impact of volatility, counterbalancing the ups and downs of stocks and bonds during times of market stress.
-
A Financial Planner's Guide to Unlocking the Power of a 529 Plan
529 plans are still the gold standard for saving for college, especially for affluent families, though they are most effective when combined with other financial tools for a comprehensive strategy.
-
An Investment Strategist Takes a Practical Look at Alternative Investments
Alternatives can play an important role in a portfolio by offering different exposures and goals, but investors should carefully consider their complexity, costs, taxes and liquidity. Here's an alts primer.
-
Ready to Retire? Your Five-Year Business Exit Strategy
If you're a business owner looking to sell and retire, it can take years to complete the process. Use this five-year timeline to prepare and stay on track.
-
A Financial Planner's Prescription for the Headache of Multiple Retirement Accounts
Having a bunch of retirement accounts can cause unnecessary complications. Consolidation can make it easier to manage your savings and potentially improve investment outcomes.
-
Overpaying for Financial Advice? A Financial Planner's Guide to Fees
Take five minutes to review how much you're paying for financial advice. If you're overpaying, you could be better off with an adviser who charges a flat fee.