A power shift is under way as investors -- wary of undisclosed conflicts of interest after various market-related scandals in recent years -- insist that their financial professionals have no incentive to pitch particular products because of commissions or underlying fees.
Deciding whether to hire a full-service broker or an independent adviser -- or someone in between -- comes down to whether you want advice tied to an individual transaction or advice designed to map out your financial life, and whether you want that advice delivered by a brokerage firm or an independent shop. Each has its strengths and weaknesses.
Stockbrokers
First and foremost, brokers are salespeople. So, when acting in that role, their income depends on commissions from client trading. As such, a broker is best for investors who want someone to bounce specific stock and mutual-fund ideas off of or who want someone who will call with investment suggestions. With brokers, you usually have the choice of paying per transaction or paying an annual fee for all the services you use, as in a so-called wrap account.
You will pay for that hand-holding, though. Commissions can easily top $100, depending on the type and amount of stock you are buying and the size of your account, compared with lesser fees at some alternatives. Some Wall Street firms require a $50,000 account to even get access to a broker; otherwise, you will be sent to a call center, where the level of individual attention is often greatly diminished.
Another important factor: brokers are not "fiduciaries" meaning they have no legal requirement to act in your best interest. Instead, they follow much looser "suitability" guidelines that, while backed by court decisions, aren't legal obligations.
If you want a fiduciary relationship, a traditional brokerage account isn't for you.
For investors who don't feel they need a broker's advice or helping hand making trades, discount and online firms are a better choice, since they also charge considerably lower commissions on trades.
Financial Advisers
There are essentially two types of advisers. Those who work independently, or outside of a brokerage firm, are known as registered investment advisers, or RIAs. Those inside a Wall Street firm are investment-adviser representatives, since the firm itself acts as an RIA, although they may have a different title. Both provide essentially the same service: big-picture financial planning and money management.
Advisers are the best choice for investors who want someone to help lasso their entire financial life -- from investing, tax planning and charitable giving to family-business succession planning and more -- and take responsibility for managing the investments. You will generally pay an annual fee of 1% to 2% of the assets under management.
RIAs typically charge a single fee for all the services they provide, which can be less expensive than paying for all the services and trading separately. By contrast, brokerage-firm advisers offer that arrangement as well but also allow clients to separate fee-based advice from transaction-based trade execution, if that better fits their needs.
Brokers are increasingly wading into financial-planning and advisory roles. Most no longer call themselves brokers but, instead, financial advisers or financial consultants. Indeed, "there is some good, meaningful planning going on inside" brokerage firms, says Dan Moisand, president of the Financial Planning Association, a trade group.
Yet the advice a broker can provide is limited because of Securities and Exchange Commission rules. Advice brokers offer in a brokerage account must be incidental to the job of trading securities for you. That means while brokers can talk about how a stock or mutual fund fits into your financial scheme, they can't offer a comprehensive financial plan.
Financial Planners
Investors have still another option: If you are looking for someone to fashion a financial plan, you don't need an adviser or broker but, rather, a financial planner. Look for someone with a credential that indicates an adherence to certain ethical standards as well as a level of knowledge such as a certified financial planner (CFP). Planners can provide the same services as advisers. The cost of a financial plan is typically a one-time fee, depending on the complexity of your needs. Local advisers and planners can be found through the Web site of the Financial Planning Association (fpanet.org).
Deciding whether to hire a full-service broker or an independent adviser -- or someone in between -- comes down to whether you want advice tied to an individual transaction or advice designed to map out your financial life, and whether you want that advice delivered by a brokerage firm or an independent shop. Each has its strengths and weaknesses.
Stockbrokers
First and foremost, brokers are salespeople. So, when acting in that role, their income depends on commissions from client trading. As such, a broker is best for investors who want someone to bounce specific stock and mutual-fund ideas off of or who want someone who will call with investment suggestions. With brokers, you usually have the choice of paying per transaction or paying an annual fee for all the services you use, as in a so-called wrap account.
You will pay for that hand-holding, though. Commissions can easily top $100, depending on the type and amount of stock you are buying and the size of your account, compared with lesser fees at some alternatives. Some Wall Street firms require a $50,000 account to even get access to a broker; otherwise, you will be sent to a call center, where the level of individual attention is often greatly diminished.
Another important factor: brokers are not "fiduciaries" meaning they have no legal requirement to act in your best interest. Instead, they follow much looser "suitability" guidelines that, while backed by court decisions, aren't legal obligations.
If you want a fiduciary relationship, a traditional brokerage account isn't for you.
For investors who don't feel they need a broker's advice or helping hand making trades, discount and online firms are a better choice, since they also charge considerably lower commissions on trades.
Financial Advisers
There are essentially two types of advisers. Those who work independently, or outside of a brokerage firm, are known as registered investment advisers, or RIAs. Those inside a Wall Street firm are investment-adviser representatives, since the firm itself acts as an RIA, although they may have a different title. Both provide essentially the same service: big-picture financial planning and money management.
Advisers are the best choice for investors who want someone to help lasso their entire financial life -- from investing, tax planning and charitable giving to family-business succession planning and more -- and take responsibility for managing the investments. You will generally pay an annual fee of 1% to 2% of the assets under management.
RIAs typically charge a single fee for all the services they provide, which can be less expensive than paying for all the services and trading separately. By contrast, brokerage-firm advisers offer that arrangement as well but also allow clients to separate fee-based advice from transaction-based trade execution, if that better fits their needs.
Brokers are increasingly wading into financial-planning and advisory roles. Most no longer call themselves brokers but, instead, financial advisers or financial consultants. Indeed, "there is some good, meaningful planning going on inside" brokerage firms, says Dan Moisand, president of the Financial Planning Association, a trade group.
Yet the advice a broker can provide is limited because of Securities and Exchange Commission rules. Advice brokers offer in a brokerage account must be incidental to the job of trading securities for you. That means while brokers can talk about how a stock or mutual fund fits into your financial scheme, they can't offer a comprehensive financial plan.
Financial Planners
Investors have still another option: If you are looking for someone to fashion a financial plan, you don't need an adviser or broker but, rather, a financial planner. Look for someone with a credential that indicates an adherence to certain ethical standards as well as a level of knowledge such as a certified financial planner (CFP). Planners can provide the same services as advisers. The cost of a financial plan is typically a one-time fee, depending on the complexity of your needs. Local advisers and planners can be found through the Web site of the Financial Planning Association (fpanet.org).
posted by chicagofinance at 10:17 AM
