The Provocateur


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Broker, Advisor, BFF? January, 2014

A number of years ago, a very bright, or perhaps a number of very bright Wall Street marketing executives made a seminal decision to change the title of “Broker” to that of “Advisor” or “Wealth Manager.” A brilliant marketing move perhaps, but also a transition which has caused, and continues to cause, confusion for asset owners, investors and beneficiaries alike; “Is my advisor a broker or my broker an advisor?” More important, however, is what the difference is and how it affects the manner in which investors, asset owners and beneficiaries are serviced and charged.

So perhaps a reexamination of the differences, motivations and incentives is warranted.

Brokers’ compensation, work environment and responsibilities differ quite a bit from those of the advisor. In short, brokers are compensated via the placement of financial services products. Obviously, commissions can come in reasonably straightforward forms such as transaction fees, 12b-1 fees or loads for mutual funds, among others. They can also come in more subtle forms such as revenue sharing, placement fees or "trailer commissions."

Brokers do not provide, are not compensated for nor are required to provide advice, nor are brokers required to operate in the best interests of their clients. Rather, brokers operate in a suitability environment whereby they are allowed to sell an investment product to a client provided it is “suitable” for the client.

Suitability can be defined in a number of ways, and candidly, is somewhat ambiguous — perhaps it’s based on the level of net worth, or the perception of the investor's level of sophistication, among others.

Brokers also have production (another name for commission or fee) goals regardless of whether the broker works for a large Wall Street-type firm or in the Independent Broker/Dealer world. The more fee/commission generation, the more the broker makes; the lower the fee generation, the more chance the broker has of not having a desk to return to in the morning.

In the inner workings of the broker/dealer world each broker is subject to a grid. The grid determines how much of the gross commissions generated go to the house and how much is paid out to the broker. The more gross commissions generated the higher the percentage which is paid directly to the broker. It’s very simple: brokers sell products which do not need to be in the best interest of their client, causing a complete misalignment of client interests! They may cloak themselves in the trappings of providing advice, but make no mistake about it, they sell products. Advisors are a different breed in that they provide advice and are not compensated via the placement of products. Rather, their compensation is generally in the form of a fee (a flat fee or percentage of assets) outside those paid to the underlying investment vehicle. While brokers operate in a suitability environment, advisors generally work in a fiduciary environment whereby they must act in the best interests of their clients at all times. In our experience, successful advisors or consultants provide their clients with an investment process which is:

  • Educational: Ongoing education for both advisors and clients pertaining to best practices, regulatory and legal considerations.
  • Documented: Understanding investment objectives, establishing Investment Policy Statements, developing asset allocation options, ongoing due diligence of investment strategies, etc.
  • Demonstrated: Implementation adhering to documented goals/objectives and risk profile.
  • Defendable: Based on validated investment practice and defendable for both advisors and clients.
  • Repeatable: Surviving any individual, including the advisor or client.
  • Clear: Complete transparency regarding how and how much one is compensated and regarding any perceived or potential conflicts of interest.

Is a broker or an advisor the right choice for you? We can’t say. But does it matter? Absolutely — and it’s the advisor, overwhelmingly!