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Broker or Advisor — What's the Difference? by Beth Jones, RLP®

There has been a long-running debate about who is better able to look after your money, a broker or an independent investment adviser. But the debate has taken on a new urgency since the shock of last year’s market losses. Business practices and regulatory guidelines at the center of the discussion are rarely understood by clients. This issue is now at the heart of the recent regulatory reform being reconciled in Congress.

FIDUCIARY VS. SUITABILITY
In the 1940s, when the laws governing the brokerage business were enacted, the role of the broker was to provide transactional services. As a result, the legal obligation to the client was established as a commercial standard, based on the concept of “suitability.”

For those advisers providing investment advice, Congress passed the Investment Advisers Act of 1940, placing those practitioners under a fiduciary responsibility. In a fiduciary relationship the responsibility for fair dealing rests solely on the shoulders of the adviser. After more than 60 years of financial markets' evolution, though, these services have effectively merged. Investors do not distinguish between brokers and advisers. In fact, a 2007 RAND Corp. report commissioned by the SEC found that individual investors generally do not understand, appreciate or care about such legal distinctions. As FINRA CEO Richard Ketchum has stated, “Maintaining two different standards is simply untenable in this world.”

While some brokers at the big firms may have access to all kinds of products, they may feel pressured to sell you one of their firm’s products. Many registered investment advisers started at brokerage firms, and many left because of these sales quota pressures.

The independent investment advisers (full disclosure–the author is an independent adviser) proudly promote their independence and lack of conflicts. If their clients feel that the fiduciary responsibility was not met, they have legal recourse through the state courts. Many independent advisers build relationships with third party vendors who help provide the infrastructure required to service clients.

But many investors still select their advisers based on the advisers’ skill and personality, according to a new study by the Oechsli Institute, a research group. “The most important factors in selecting the adviser is the reputation of the individual and the impression that person makes in terms of professionalism and competence,” said Matt Oechsli, the chief executive. “The trust you have for the firm goes up if you trust the adviser; if you don’t trust your adviser you don’t trust the firm. This is the first time this has been inverted.” The Oechsli report, “The New World Adviser,” found that clients with $250,000 to $10 million in investments were more worried about clear, timely communication and quick problem resolution than about investment performance. A majority of respondents on the lower end of the investment range said they did not believe their adviser was doing a great job, it found, and were looking for a better option.

While, some investors do not have enough money to meet the minimum required investment of $1 million for certain wealth managers, some independent advisers actually focus on the middle market with minimums as low as $100,000, and may work on an hourly or flat rate basis for financial planning.

Time will tell if the fiduciary standard becomes the rule for brokers with the new financial regulation. Obviously, I feel strongly about the fiduciary standard of care, and you must determine who you trust to work with you in creating and monitoring your financial plan. This really goes far beyond which products are in your portfolio. You want a trusted adviser who understands your life.



Beth Jones, RLP® is a Registered Life Planner and Financial Consultant with Third Eye Associates, Ltd, a Registered Investment Adviser located at 38 Spring Lake Road in Red Hook, NY. She can be reached at 845-752-2216 or www.thirdeyeassociates.com. Securities offered through Commonwealth Financial Network, Member FINRA/SIPC.



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