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).

Understanding Arbitrage Trading

Today was a hot and sweltering day, signaling the true beginning of summer. As usual, I decided to walk to the local café, because I enjoy the caffeine jolt of a strong cup of coffee. I regularly purchase the 20 ounce size, and at my outlet they charge $1.80 for the privilege. Some people think it’s a bit much for a cup, but I gladly pay for what I think is good value.

On this particular day, I decided that drinking something with the warning “…careful, the beverage you are about to enjoy is extremely hot…” might be a mistake. So instead I asked what an Iced Coffee would cost.

“That would be $2.80” was the reply.

“One dollar for a cup of ice?” I asked in a puzzled tone.

Well, I decided to order my regular burning hot cup on principle.

After my order was rung-up on the register for $1.80, I asked how much would a large plastic cup of ice with a straw would cost. “Oh! – no charge of course.”

Fine. I took my booty, walked over to the condiment station, poured the hot coffee over the ice, threw the paper cup away, and merrily left to face the heat and humidity.

Believe it or not, if this example makes sense to you, then you understand what participants in the financial markets call an “Arbitrage Opportunity”.

A clever person (let’s call him a “Trader”) will identify opportunities in the market, and trade to take advantage. One of the fascinating innovations of the Financial Markets is the ability to sell something “short”. To sell short is to establish a market position by selling a security one does not own. We will use our Iced Coffee example to illustrate.

In the market, a Trader seeing an opportunity will offer $2.80 cups of Iced Coffee to the public at a nearby street corner. The Trader doesn’t have any coffee, so if he sells a cup, he quickly rushes into the café, and orders a coffee at $1.80 with a free cup of ice. He quickly converts the regular coffee into Iced Coffee, and delivers it to the purchaser to close out the sale from a few moments earlier.

In our example, Trader was “short” an Iced Coffee when he accepted an order on the street corner for a product he wasn’t immediately able to deliver. He “closed out” his short position only after he bought (or went “long”) a cup of hot coffee at the café and delivered it to his street corner customer.

What happens now? Well, not everyone is going to want to pay $2.80 for Iced Coffee, especially when they realize after watching the Trader run back and forth that they too could create the drink for less money. So as the Trader cycles more and more coffee through this profit-making machine, the market notices, and he has to drop the price so people will continue to buy. The offers begin at $2.75, soon $2.60, and finally $2.50.

Our café friends are not too happy either. It would not take very long for them to figure out what the Trader was doing, so they soon start charging 25¢ for the ice, then 50¢, and finally 75¢, and then “presto” the opportunity is gone. The Trader can create an Iced Coffee from piece parts that now cost more than $2.50, but can only sell it for $2.50. So he’ll pack his bags and wait for the next chance.

This type of activity occurs from time to time in the financial markets in all sorts of assets, including stocks, bonds, and commodities. In fact participants have computer programs that are constantly analyzing different combinations of investments to find less expensive ways to buy and sell equivalent assets. Once these programs identify an opportunity, they automatically trade to profit from it.

Amazing isn’t it? Easy to understand. However, because our financial markets are reasonably efficient, arbitrage is difficult to execute. At least not without a few Physics and Math PhD’s at your disposal, along with an investment banker or two.

I enjoy pondering this kind of stuff, because the financial media often reports on these concepts in a manner that is almost impenetrable for the public. Ripping away all the jargon, it’s fun to talk about a complex activity in an accessible way, and share my expertise.

Alright. All this talk is making me thirsty.