Is there a difference between a financial advisor, a financial consultant, and a wealth manager? What about a financial planner, a registered representative, and an investment advisor representative? Do these titles really help the average investor distinguish between proficiency and job function? The answer is, unfortunately, no. These titles do nothing more than to self-designate supposed capabilities. Just because a financial advisor holds the CFP (Certified Financial Planner) designation does not mean that individual will always act as a fiduciary. Instead, determining which official laws and regulations an advisor operates under is the more important question to answer.
Making it worse, there are a lot of “financial advisors” in the U.S., 310,504 to be precise (Think Advisors, 2017) and the vast majority of them are are not required to place your interests before their own. So how do we know which advisors are here to help and which are here to sell a product? Keep reading to learn more about what to look for when you begin researching San Diego Financial Advisors.
Types of Financial Advisors
Why you should work with an Independent Advisor
There are three (3) types of financial advisors out there: Brokers, Dually Registered Advisors, and Independent Advisors. They are all different and most have different incentives. It is important for all investors to know these differences.
- Broker – 90% (~279k)
- Dually Registered Advisor – 8.4% (~26k)
- Independent Advisor – 1.6% (~5k)
A broker is a financial advisor that works for a broker/dealer and/or an insurance firm. They are paid a commission or a fee for selling products to their clients. Most of the financial household names are broker/dealer firms, including Merrill Lynch, Edward Jones, Morgan Stanley, Ameriprise, etc. In fact, 90% of all financial advisors in the U.S. are brokers. What is disturbing about this fact is that brokers don’t have to recommend the best product for their clients. They only have to provide a suitable product to their clients, not what they think is best. By law, brokers only have to adhere to the suitability requirement, which is a very low bar to clear.
To be clear, I’m not suggesting that all broker/dealer financial advisors are Jordan Belforts or Gordon Gekkos in hiding. In fact, most financial advisors that work at these firms are good decent people. I worked at some of the largest and most well-known broker/dealers in the world and I can tell you from experience: most financial advisors intend to do well for their clients. However, brokers have a major conflict of interest: they get paid by selling financial products to their clients.
It is one thing to trust somebody and it is another to trust their incentives. History proves that it is wiser to follow the latter. A broker’s incentive is to to sell high-paying products to their clients. They will earn more by recommending certain products over others. If a broker had to choose between an actively managed mutual fund with high fees and a passively managed ETF with low fees, he/she will almost always choose the higher fee option.
Registered Investment Advisors
Now, this is where it gets a bit confusing. Of the 310,504 financial advisors in the U.S., approximately 31,000 (~10%) of them work for a Registered Investment Advisor (RIA) firm. This math doesn’t jive with the figures above because, technically, both Independent Advisors (1.6%) and Dually Registered Advisors (8.4%) both operate under an RIA firm. Though, there is a big distinction between the two, which I will address in the next section.
While there are many options for San Diego financial services, RIAs are required by law to place their client’s interest before their own, which is known as the fiduciary standard. Bull Oak Capital, of course, is an RIA firm. This fiduciary requirement is the highest standard within the financial services industry. It is so onerous, we have to disclose any potential conflict of interest and potential risks to the public.
“In translating fiduciary principles into application, an RIA is required to implement certain practices and procedures to ensure conformance to the law. At the heart of conformance is the registration form (ADV Parts I and II) that financial advisors must file with the SEC. It is ADV Part II; in which the advisor must disclose all material information a client needs in order to make an informed decision about the advisory relationship or a specific transaction.” (Investopedia) The information and disclosures required include:
• All material facts of any instance in which a conflict of interest may exist; past, present, or future
• Any type of arrangement or relationship the advisor has that could present a conflict of interest, including participation or an interest in any client transaction
• All material risks involved with methods of analysis used in determining suitability
• Any unusual risk involved in a specific investment strategy or security
This detailed information must then be compiled into a client brochure and written in clear language in a specified format, so investors may compare one firm to another as apples-to-apples.
Dually Registered Advisors
If you were to choose between working with a broker and working with an RIA advisor, the choice is pretty clear, right? Perhaps, not quite so. Now, here is a rather well-kept secret within the industry. Most of the independent fiduciary advisors in the industry are not fiduciaries 100% of the time. These advisors are Dual Registered Advisors. Dual Registered Advisors are financial advisors that are registered as a broker (under a broker/dealer) AND they are registered as an RIA.
So, what does this mean? This means that they can claim to be a fiduciary independent advisor in one hand and sell products for a commission as a broker in the other. It’s a shady business. These advisors can earn a client’s trust by telling them they are fiduciaries and that they are obligated to place their interests before their own. Then, they can switch hats and sell them financial products for a commission. And, unfortunately, the vast majority of independent advisors are structured this way.
A lot of CFP professionals fall under this category. They like to state that being a CFP requires them to act as a fiduciary at all times, but keep in mind that the CFP designation is beholden only to itself. It is a self-regulating designation via the CFP Board and it does not face any legal ramifications if an individual breaches the fiduciary veil.
True Independent Fiduciary Advisors
Of the 31,000 RIAs, 26,000 of them are Dually Registered Advisors. This means that only ~5,000 RIAs are true fiduciary investment advisors without this huge conflict of interest. (TonyRobbins.com) This represents only 1.6% of the 310,504 financial advisors in the U.S. Bull Oak Capital, of course, is one of these firms.
So, how can one tell if their fiduciary advisor is dully registered or not? For one, brokers are registered with FINRA and RIAs are registered under the SEC. A simple test is to see if they are registered under both. By checking out FINRA’s Brokercheck, you see if your advisor is registered as a broker, an independent advisor, or both. By searching any broker/advisors name, you can easily find out whether or not that individuals is a broker or not. For example, you can see my filings on the SEC website, which states, “Not currently registered as broker.”
While the information presented herein is believed to be accurate, Bull Oak Capital LLC (Bull Oak) makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in the document. Bull Oak is under no obligation to notify you of any errors discovered later or of any subsequent changes in opinions. Nothing herein should be construed as a recommendation to buy or sell any of these securities. It should not be assumed that any of the securities, transactions, or holdings discussed will prove to be profitable in the future or that investment recommendations or decisions Bull Oak makes in the future will be profitable or will equal the investment performance of the securities discussed herein. Bull Oak or its employees may have an economic interest in securities mentioned herein.