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2 Types of Financial Advisors Can Guide Your Investments

Nov. 15, 2014
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By Laurel Hardy

Learn more about Laurel on NerdWallet’s Ask an Advisor

Not all financial advisors are the same. Some work for companies called broker-dealer wire houses, and others are independent and work for themselves. I’ve been both. Here are some important differences between the two types.

Broker-Dealer Advisors

  • Financial advisors with broker-dealer wire houses are also referred to as registered representatives, registered reps, stock brokers and brokers.
  • The broker-dealer considers client relationships to be its property, and the advisor to be their representative to the public.
  • Clients can be sent to other advisors, registered representatives, or even call centers at the discretion of the firm.
  • Advisors may be asked to provide client information to another part of the institution for cross-selling purposes.
  • Clients are sometimes contacted by the institution without the knowledge of their financial advisor, most often by mail.
  • Management pressures advisors to make sales to their clients and push certain products.
  • Product recommendations are limited to an “approved” list by the broker/dealer firm.
  • Recommendations need only meet a standard of suitability, not a fiduciary standard.
  • The Financial Industry Regulatory Agency (FINRA) oversees the operations at wire house broker-dealers.
  • There are some really smart, honest, upstanding individuals working as financial advisors for wire house broker-dealers who are extremely knowledgeable about investments. It can be difficult for the average consumer to differentiate between them and individuals with less integrity and wisdom who tend to thrive in sales environments.

Independent Advisors

  • The fiduciary standard independent advisors are held to is much stricter than the suitability requirements a broker-dealer wire house must uphold.
  • The Securities and Exchange Commission (SEC) or the state will oversee the operations at an independent investment advisor.
  • Independent advisors have more freedom to choose their fee structure, so they can offer fee-only, fee-based, or commission services, but must disclose to clients all ways they will be charged.
  • The relationship between a client and advisor is not shared with a third party (there is no institutional firm).
  • Information shared with an independent advisor is kept more confidentially than at a large institution, which will often share information between branches for cross-selling purposes. They must have client permission to do so by having a client sign an agreement.
  • Investments that are not allowed in a larger wire house are available. The reasons they might not be allowed vary, but often it’s due to conflicts of interest between the firm underwriting an offer and the firm selling it. It is not always due to stricter quality control.
  • There tends to be a large number of advisors who have accounting or tax preparation backgrounds as opposed to sales or investments.
  • Advisors who are independent do not have to take custody of all of your accounts before making recommendations for you.

I have met incredibly smart, experienced individuals in both arenas. Chances are, if you really like your advisor, whether they’re independent or at a wire house firm, they will take care to guide you in the right direction. The best advice I can give to someone choosing an advisor, though, is, don’t ignore your gut. If you feel someone doesn’t understand investments well, doesn’t listen to you, is pushy, and is not honest, your gut is probably correct. You don’t need to stick around to get proof. I’ve run into lots of great people in this field. There’s plenty to go around, so don’t settle.