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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free 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.
-
The Most Popular Apps for Retirement Planning in 2025A J.D. Power survey ranks retirement planning apps based on customer service and satisfaction. Does your financial app make the cut?
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary FormsStandard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
Don't Disinherit Your Grandchildren: The Hidden Risks of Retirement Account Beneficiary Forms
Standard retirement account beneficiary forms may not be flexible enough to ensure your money passes to family members according to your wishes. Naming a trust as the contingent beneficiary can help avoid these issues. Here's how.
-
This Is How Life Insurance Can Fund Your Dreams NowBeyond a death benefit, life insurance can provide significant financial value and flexibility through 'living benefits' while you are still alive, helping with expenses like education, business ventures or retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
