Who Really is the Financial Advisor?

Most advisors are really just salespersons. Sometimes it's hard to tell, given all the titles used by brokers: financial adviser, financial consultant and financial planner, to name just a few.

Many of these sound quite similar to "investment adviser" but there's a big difference. Investment advisers, unlike brokers, have a fiduciary duty to their clients. That means they have a legal obligation to place the client's interests ahead of their own, and to clearly identify all sources of compensation, the amount of compensation and any potential conflicts of interest."

Brokers are paid by a formula that will increase as revenues increase. As an example, compensation of $100,000 of business will be more than compensation of $50,000 of new business. These are based on different percentages of the total compensation.

Some brokers become very aggressive at the end of the year in an attempt to move to the higher percentage and the products they will rely on the most are the ones with the highest fees and the highest commissions, such as variable annuities and mutual funds with loads.

Fee based accounts can allow clients to trade as frequently as they wish for a fee of usually 1% to 1.5% of the total assets. Depending on the activity in the account, many investors may be ahead allowing a charge for a trade than the fee on the held assets.

Separately managed accounts which can create a customized portfolio can come with unusually high fees. With these accounts, the broker charges a "wrap fee," with the broker's fee wrapped around the fee of the investment manager. And the broker's fee can often be more than the manager's fee, possible twice as much. It is not uncommon for these fees to be in excess of 3% of the total account value annually. The fee is deducted but not itemized so it is not possible to know how much of the total fee the broker is receiving.

Here are some definitions worth knowing:

A fee based financial planner can charge a fee and also earn a commission for executing their recommendations.

A fee only planner will only charge a fee and cannot earn a commission for products they advise.

Bill Broich is thirty year annuity salesman who helps agents generate leads and sales. To discover more visit his website: Annuity Leads