Who is Handling your Money?

Most people will probably reply with “a financial advisor with such and such company.” However, many people do not realize financial advisors, despite having the same job, fall into one of two categories: Stockbrokers or Investment Advisors. This factsheet aims to provide an introductory summary of the substantial differences between the two.

The Legal Difference

The most important difference between brokers and investment advisors is the different legal standards to which they are held. Stockbrokers are held to a standard of suitability. This standard requires the stockbroker to place a client in investments that suit that client’s investment needs and risk tolerance. However, the stockbroker is permitted to place his or her interest above a client’s, so long as that suitability standard is met. Conversely, investment advisors must uphold what is legally referred to as fiduciary duty. Fiduciary duty requires that an investment advisor must always place the client’s best interest first. In fact, like a doctor or lawyer, an investment advisor is legally prohibited from placing its interest above a client’s.

The Money Difference

Another difference lies in how your advisor may make money. Stockbrokers are permitted to earncommissions on selling products (mutual funds,annuities, etc.) or trades. This means that your stockbroker may have an incentive to recommend certain products, including specific mutual funds and annuities. Since these products pay the brokerfor a recommendation, these funds may be very expensive. Investment advisors, due to the fiduciary standard, cannot make commissions from recommending products; they must charge the client directly for advice. This is why investment advisors charge clients a fee, often a percentage of assets that are under management. However, some investment advisors charge a flat fee or an hourly fee.

Switching Hats

Some financial advisors are registered as stockbrokers and investment advisors. When an advisor is acting as an investment advisor, he or she must act as a fiduciary. If the advisor is acting as a broker, he or she must only fulfill the obligation of suitability. However, a financial advisor registered as an investment advisor and a stockbroker is allowed to engage in a practice known as switching hats. Switching hats means the financial advisor is allowed to switch between acting as a stockbroker and an investment advisor at will. The advisor is even permitted to switch multiple times during a single meeting with a client. In essence, during a single meeting, the financial advisor might be acting under two entirely different legal standards.

Our View

Endress Capital Management is a fee only firm. This means we are only registered as investment advisors and all of our fees come directly from our clients. Therefore, our view on this particular subject might be seen as a little biased. However, we incorporated as a fee only firm because we believe it is in the best interest of the investing public. We believe that for two main reasons.

Primarily, a fee only firm is subject to a higher legal standard. Remember, that standard is called the fiduciary standard. Fee only firms must legally act in the client’s best interest at all times. Secondly, fee only firms have very transparent fees. Since fee only firms charge clients directly, you can be assured that investment recommendations are not given because of a commission incentive for the advisor. Additionally, since clients know exactly what they pay a fee only advisor, there is a sense of accountability that might be lacking with a stockbroker.

If you have more questions about this topic or any other investment-related topic, please contact us.